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Professor Robert Shiller, Yale University

On depending on houses

Professor Robert Shiller: It’s an amazing fact that people have the impression recently that home prices might go up 10% a year. I know that because I’ve done surveys in the US, some boom cities had such massive expectations and for the long run. Moreover, people felt that while there could be a drop in home prices, it couldn’t be for long, and there was a general perception that housing is a wonderful investment and it can’t go wrong. I’ve been puzzling over how that idea got such traction, and I have various theories about it, but I don't know if I have a compete answer.

One is that it was kind of a displacement of the confidence we had in the stock market in the 1990s. People got into the idea that I should be able to find some investment that will make me wealthy, and they shifted from the stock market to the housing market. Another thought was that real estate agents found it profitable to reinforce that view. I don’t mean a conspiracy, it’s more that it was already a view and maybe they would repeat it. I looked at books written during the peak of the boom about real estate investment, and there were many of them because this was an exciting time, and I found that the books didn’t so much, generally didn’t defend the view, they just took it as everyone knows this, and they would tell stories about successful investors and advice about minimising taxes or that sort of thing.

But another theory that I have is that it has something to do with the general rate of inflation and our failure to remember old prices, except housing prices. Everyone remembers what they bought for a house, and so they’re struck by the contrast between what prices were fifty years ago and what they are now, and so they have a mistaken impression that home prices went up more than others. For example, we just sold the home from the estate of our grandparents, they bought it in 1955 for £10,000, and now they’re selling it for £300,000 and, you know, you think wow that sounds amazing. But if they’ve just calculated what the inflation was between then and now that would account for most of that, and there’s a failure to understand that.

The different between Chinese and ‘western’ attitudes to saving

In fact, lavish lifestyle, conspicuous consumption didn’t feel right to most Chinese. They thought that they were part of a historic story that they would some day tell their grandchildren, and their grandchildren would be rich and comfortable, and it was better to be working hard towards this story. In contrast, in advanced countries, like the UK, we have a very different feeling that we’ve kind of arrived and there’s nothing particularly happening now except that maybe I’m becoming a success or, and so we’re more likely to want to lead the lavish lifestyle and spend than the Chinese would.

How crises are global now

The crisis seemed to start in the United States because we call it the “subprime crisis”, that was a mostly US phenomenon, but anything that happens in the world today is global in the economy, and if you look at what’s happening in different countries of the world there’s a remarkable consistency. We’ve had stock market booms and crashes and booms again, the pattern looks so similar across many different countries. We’ve had real estate booms. It’s not just in the United States, UK, Europe, it’s also in China and India and Australia, lots of, not everywhere but lots of places. We’ve seen the recession appear in so many different countries, all at the same time. We live in a definitely global economy, and I think that’s largely a reflection of global culture. We are much more in synch with each other in our thinking than ever before in human history.

The reasons for global crises

The enormous change which brought about speculative phenomena is our improved communications technology. We didn’t have speculative bubbles apparently in the world until they invented the newspaper in the 1600s. Since then we’ve seen the expansion of our news media and means of communication so that it now operates with electronic speed and that has improved the contagion rate of bubbles, and so it makes it possible. It also makes them more coordinated on a world scale. If you go back to the 19th Century you’ll find, for example, real estate bubbles that were isolated to one city.

Why bubbles end

It’s always difficult to explain why a bubble ends. If you look at historic bubbles, they seem to end for no reason, and they often end quite suddenly. And I’ve looked back at history and tried to read the accounts of ends of bubbles and it seems to me that usually the end is caused by the internal dynamics of the bubble itself. What tends to happen is home prices get very high and the stories of the craziness of the bubble suddenly start to become salient. Maybe this is an oversimplification but people start to worry and stories start to appear that encourage that.