Tag Archives: economic bubbles

Blowing ‘Bubbles’ in Pakistan

“…And now a bubble burst, and now a world.”

All around us in Pakistan, there is chaos waiting to happen nowadays. At times it is an accident, a politically motivated murder or even a suicide bombing. The deeper level outcome of this is at the end, the bubbling up of various aspects of the economy.

One of the implications can be directly seen in the oil and gas sector where again at present we can see a sharp incline. Petrol and gas prices increase almost every month – and the ceiling apparently has not been reached yet. There will come a time when the masses can take it no longer and perhaps this is a slump waiting to happen…

The cost of living is also high and increases by the day. The domino effect latches on to the property market where the bubbles are the most prominent. There are several who want to live in better places but do not have the buying power.

Among economic bubbles, a property bubble or real estate bubble is the inevitable product of speculative investment. It occurs cyclically in both local and global real
estate markets. Typical characteristics include rapid increases in property valuations followed by a severe ‘crash’. This occurs when prices have reached unsustainable levels relative to incomes etc.

Presently we are experiencing local bubbles or a little froth at least, in several parts of the
world including Pakistan. According to the Economist(2005), “the world wide rise in house prices is the biggest bubble in history”.

Economists have developed ratios and indicators for fair valuation of residential areas. A few indicators might be pointed out courtesy of economists striving to identify bubbles before they burst:
  1.  Bubbles can be identified by comparing current levels to previous unsustainable levels.
  2. The valuation component measures affordability relative to current prices by mainly looking at the price to income ratio that is the ratio of median house price to median familial disposable incomes.
  3. The debt component measures the debt incurred by households and bank loan accumulation by buying such property. When the ratio increases that is home ownership costs increase, households start depending on property values to service their debt or expenditure.

In case of real estate bubbles, the reality of experiencing one may not be as important as the slow and sure but difficult to identify tragedy of an impending house price crash. Some important points to keep in mind about price crashes are:

–      After a bubble, the crash is a slower process, as sellers do not sell their own homes.

–       Due to inflation in nominal terms prices stay flat for 3-5 years before a fall, which makes it trickier to spot the crash.

–       Office, hotel and retail sectors share the same trend as residential sectors.

Pakistan’s macroeconomic foundations seem shaky. Developing countries following inward growth oriented approaches have faced crashes. Growth needs to be sustained
through exports and manufacturing than an obsession with volatile property markets. The select hundred thousand of the main beneficiaries are by and large exempt from the brunt of taxation. Levying tax would surely burst the bubble, but at the same time increase affordability for the masses. Only the landowners get rich when property prices go up while a nation can get rich only when the labour prices (salaries) go up.

After all, the bigger the bubble, the harder it bursts.