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Realistbear

Could This Be The Cause Of Hpi And Other Bubble Markets?

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http://biz.yahoo.com/weekend/happyshop_1.html

The Wall Street Journal online.

"Science is now discovering what Ms. Samizay and many consumers have known all along: Shopping makes you feel good. A growing body of brain research shows how shopping activates key areas of the brain, boosting our mood and making us feel better --
at least for a little while"
.

Perhaps the cause of irrational exhuberance that occurs when a bubble is forming can be traced to the chemical brain dopamine (aptly named!). Once you start its hard to stop and the euphoria only stops when the supply of that which made you high becomes unnatainable. Then crash----depression and anxiety follow.

Sounds a lot like how the mass phychology of bubble markets behaves as the bubble inflates and after it has popped.

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The bubble nature of the housing market is due to the lack of arbitrage opportunity within the market.

The idea behind arbitrage is that if I know that prices are significantly above their equilibrium value I can then use this knowledge to make a profit by entering into a contract to sell the assets at a future date, based on the current price.

When it comes to sell prices should have returned to their equilibrium value so I can make a profit by buying at the new (lower) market price and selling at the higher contracted price. The ability to do this has the effect of stopping prices deviating too far from their "true" value.

The problem within the housing market is that there is no mechanism to do this. We all know that current prices are 30% above their equilibrium price and must fall but there is no way that we can make money out of this.

Without a corrective mechanism house prices swing wildly about their economic value, resulting in the bubble that we see, and possibly a negative bubble afterwards.

Prices end up being set by the sentiment in the market and not by any reference to the underlying economic value. When people believe prices are going up they will be happy to buy at any price believing that their "investment" will grow; conversely, when people believe prices are going down they will refuse to buy at almost any price, viewing it merely as an opportunity to loose money.

For a full explanation see Andrew Farlows second paper via the front page to this site.

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I am wondering if there is a connection between the economics of the marketplace and the physiology of the brain. Research shows that gambling addicts gain a greater high from losing than from winning. Could this be what is causing people to continue buying in the face of a falling market? I.e., the "irrational exhuberance" described by Al Greenspan. Why "irrational?" What causes the masses to behave this way?

Why did the CBI report the lowest level of optimism in 22 years recently? Could this be the collective low from a sustained high gained from buying homes that could not be afforded and high street purchases that would cause severe indebtedness?

The mass psychology that seems to be manifest at this point in the HPI is a sudden loss of euphoria and more a sense of confusion and bewilderment. Gordon's U-turn on SIPPS seems to reflect this confusion in the marketplace. So what follows euphoria and ensuing confusion--???? If the mass has a psychology it does not seem like it will be a period of calm (soft landing) but a shift in the opposite direction (HPC) to regain the same sense of thrill.

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No way have I got the guts to tell my wife she's suffering from dopemine overdose!

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It looks like hpi could be controlled by the mass prescription of dopamine suppresants to the general populace. :lol:

Any ideas for controlling inflation, perhaps by shooting the surplus demand so bringing supply and demand into line. :lol:

Edited by deano

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The bubble nature of the housing market is due to the lack of arbitrage opportunity within the market.

The idea behind arbitrage is that if I know that prices are significantly above their equilibrium value I can then use this knowledge to make a profit by entering into a contract to sell the assets at a future date, based on the current price.

I'm not convinced -- there was plenty of arbitrage opportunity in dot-com shares.

But we're going to find out, as REITs will give you an arbitrage opportunity in the residential property market -- if you think prices are going down, you can short shares in REITs.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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