Those of you who are kicking yourselves for not jumping on the bitcoin wagon earlier might find some cold comfort in the knowledge that the meteoric rise of the cryptocurrency most likely points to a bubble, one that will burst in spectacular fashion one of these days.
An economic or bubble happens when a type of asset gets grossly overvalued. The price of the asset goes up not because of the asset’s intrinsic value, but because people are buying irrationally or speculating. And when the bubble bursts, people lose a lot of money.
Here are five other bubbles the world has fallen for in the past 20 years.
Dot-com bubble (1990s)
If you’re old enough to have grown up without an iPad in your hands, you probably remember when your household first got the Internet, a snail-paced dial-up connection that made you wait hours for Geocities websites to load.
Around the same time, the dot-com bubble was swelling. In about 1997 to 2001, thanks to the rise of the Internet in households, many web-based businesses were set up. Investors threw their money into these businesses or dot-coms, and subsequently got burned when the bubble collapsed in 2000 to 2002.
Of course, not all companies went bust. For instance, Amazon is one example of a dot-com that managed to survive and has now surpassed its previous share prices.
Asian Financial Crisis (1997)
Asset bubbles were behind the Asian Financial Crisis of 1997. It all begin when the Thai baht bubble burst, causing the currency to collapse. This set off a chain reaction of asset bubbles bursting, with currencies, stock markets and real estate prices plummeting.
The financial crisis illustrated the danger of courting fast money and allowing asset bubbles to grow. Corruption and crony capitalism have been cited as one reason these asset bubbles grew to such shocking proportions, as rich, well-connected people ploughed their money into Asian economies.
US housing bubble (early 2000s)
In the first half of the 2000s, real estate prices in about half of the states in the US soared, only to decline in the second half of that decade when the bubble burst.
The biggest catalyst of the bursting of the US housing bubble was the credit crisis—simply put, banks were lending property buyers money way too easily just to close sales, and obviously that was a recipe for disaster. The collapse of the housing market saw thousands of homeowners going bankrupt and unable to repay their debts.
China stock market bubble (mid 2007s and mid 2010s)
China’s stock market has proven very volatile. In 2007, a stock market bubble burst after investors engaged in panic selling following news that the authorities might raise interest rates and put a stop to speculative trading. The Shanghai Stock Exchange’s SSE Composite Index fell a whopping 9%.
In 2015, China’s stock market crashed to much fanfare. The bubble that rose in the preceding years was driven largely by retail investors, who were often borrowing money to invest in stocks and inflating prices.
In June 2015, these investors fled, causing a 30% fall on the Shanghai Stock Market within the first month of the bubble popping. The stock market recovered somewhat by December 2015, but then experienced another precipitous fall in January 2016.
Singapore private housing bubble (ongoing)
Commentators are still arguing over whether Singapore’s private housing is in a bubble right now, but some signs point to yes. While the cooling measures have had a dampening effect on property prices for several years, the market seems to be picking up now.
The strongest sign is the recent spate of collective sales totalling $5 billion in 2017 alone, a huge leap from $1.2 billion in 2016 and a mere $380 million in 2015. Developers have been paying abnormally high prices for the land, which could translate to higher property prices. Private housing transaction volumes have also been increasing as private homes become more affordable for Singaporeans.
Will this trigger a housing bubble? Only time will tell. Singaporeans would do well to base their buying choices on careful calculation and research, rather making irrational purchasing decisions.
Have you ever been burnt in an asset bubble? Share your stories in the comments.