19 January 2018

The Madness of Crowds

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The ‘Tulip Mania’ was the first recorded asset bubble in history, dating back to the 1600’s in the Netherlands. During this time, prices for tulips went parabolic, increasing tenfold in 83 days before cascading down in a catastrophic bust. The behavior and predictability of bubbles have been of great interest to both investors and economists. Although, each bubble may be unique in terms of its characteristics, they typically all share four phases: (i) stealth (ii) awareness (iii) mania (iv) blow off.

In the real estate market, the largest crash in recent times was during the World Financial Crisis of 2008. A closer look into Dubai’s and California’s real estate market, reveals that both cities rallied 50% and 30% respectively (24 months before their peak). During the WFC, the housing market in California crashed by 32%, whereas Dubai real estate assets fell by 29%, exhibiting strikingly similar behavior for markets that could otherwise not have been more different.

Bubbles exhibit a predictable pattern, or so the debate goes. This implies that price action is an integral component for investors to monitor as they consider investing in any asset class.

In Dubai, (as is the case throughout the world), there have been period of booms and busts; what the research reveals is that there is as much probability of a “melt up” following a price rise as there is of a “meltdown” following a price rise.

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