History tends to view a run up in asset

prices as irrational bubbles, produced by

illogical investors acting on psychological
motivations, named animal spirits by
Keynes. In real estate a rapid rise in asset
prices can be viewed as a rational
collective action problem, much like the
tragedy of the commons or the paradox of
thrift , and not the result of irrational
investments.
History
JLL
Asset price inflation in real estate a
rational collective action problem?
The question of asset pricing and whether bubbles
which can be defined as irrational price changes
can and do exist is at the forefront of public debate
following the unusual monetary conditions that have
occurred since the global financial crisis. For real
estate an irrational price change would be a capital
value rise in excess of the commensurate income
stream rise- in short excessive yield
compression. Shifts in real estate asset prices are
the result of cumulative actions of rational investor
actions, even if the final result may look irrational.
Irrational Price Changes
JLL
Asset price inflation in real estate a
rational collective action problem?
Tuplipmania is usually cited as the classic
bubble based on irrational behaviour. The
Economist ran an excellent article in
October 13 on the Dutch tulip bulb bubble
of 1637. This article which is based on a
series of academic papers suggests that
investors in the tulip bubble were acting
rationally and that there was no mania
causing investors to act irrationally.
Tuplipmania
JLL
Asset price inflation in real estate a
rational collective action problem?
This response can also be observed in the real
estate market where shifts in rules or shifts in
demand result in a sharp change in pricing.
Real estate as an asset class comes in large
lot sizes and is in general less liquid than, for
example equity, bond or foreign exchange
markets. This means that shifts in asset prices
are more likely to be based on rational criteria
compared frequently traded assets such as
shares in a particular company.
Real Estate Market
JLL
Asset price inflation in real estate a
rational collective action problem?
The resolution of such a collective action
problem is first to gain agreement from the
parties that their individual maximisation of
value does not produce the optimal outcome
for society, and second agree what measures
need to be put in place to ensure
cooperation. In the tragedy of the commons,
formal rules are put in place to conserve
stocks or to implement private property
rights.
Resolution
JLL
Asset price inflation in real estate a
rational collective action problem?
Solving other collective action problems is not as easy.
Following the GFC, to prevent a collapse of aggregate
demand the G 20 governments agreed to implement
stimulus packages and ultra-low interest rates to keep
demand above a point where economies could spiral
downward into deflation. The steps taken were the
solution to a paradox of thrift problem and in turn have
created another collective action problem. Monetary
conditions aimed at easing the paradox of thrift, have
created conditions where real estate asset prices have
held up; the result of a series of rational decisions- not
irrational investment sentiment.
GFC
JLL
Asset price inflation in real estate a
rational collective action problem?