Real Estate Bubbles: The Bigger They Are, The Harder They Fall

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The real estate bubble that started at the turn of the millennium was the greatest we’ve seen in the past 120 years. As the saying goes, “the bigger they are, the harder they fall” and this is why we’re still seeing the effects today. In hindsight we can shed some perspective on this last bubble and see just how big it was in relation to previous bubbles of the last century.

The Making of a Bubble

As soon as prices start to rise in any economic cycle, someone is bound to start crying “bubble” and the Chicken Littles come out to tell us “the sky is falling”. How do we know when they’re actually right about a bubble?

The following is a graph of the Case-Shiller Index of American Home prices indexed back to 1890 and will give us some ideas about what can be considered a bubble. (Click the image to see full-sized)

Case Schiller Housing Price Index 1890-2011

Looking at the graph we can see the magnitude of the bubble that formed between 2000 and 2008 was far greater than anything we’ve seen in the past century. In the early half of the 1900s, the First World War, Great Depression and Second World War depressed values for an extended period which was followed by a quick return to more normal values following the war. Home values then remained relatively stable until the booms of the ’70s and ’80s which ended before they got too out of hand. Following the dot-com crash of early 2000s, a significant run up in house prices fueled by low interest rates and loose lending criteria led to overly inflated home prices. When the credit crunch hit, the house of cards started to collapse and created what is now known as the “Great Recession”.

Look for Sustainability

When looking at home prices and trying to determine whether a bubble exists, it is important to put things into perspective by considering things like the graph above. Looking at indexes can help us understand where values stand today in relation to the past. Whether we are looking at home prices, interest rates, or affordability we want to see what the trends are and whether they are sustainable. Most people would agree that the growth in house prices seen in the early 2000s were not sustainable, but during the boom people let emotions take hold and the collective “Irrational Exuberance” led to one of the largest housing bubbles we’ve seen to date.

Never let your emotions control your investing choices. Take the extra time to examine the trends, put things in perspective, and make an educated decision.

Graph Source: How Far Will Your House’s Price Fall?
Creative Commons License photo credit: t-miki

About Author

Andrew is a Canadian real estate investor and analyst who works with Joint Venture partners to create long-term wealth. With a focus on buying and holding positive cash flow properties in Canada's Technology Triangle, Andrew makes the benefits of real estate investment available to those who lack the time or expertise to buy and manage property themselves.


  1. Kaye Dennan on

    Yes, when you look back in hindsight it is quite frightening to think that so many people got caught up in the rising prices.

    Your quote “the bigger they are, the harder they fall” is so true. We had a friend that we saw build a massive portfolio over the past 15 years end up in bankruptcy by losing money in the share market then the property market following the GFC.

    Caution and calculation is certainly the key.

  2. Andrew, I agree that making an educated decision without the emotion is critical in real estate. Another point: when making a decision in today’s market, it is important to examine the local trends in the neighborhood where you are buying and selling, rather than national trends.

  3. Do you think house prices are still going to drop further? When will we hit the bottom?
    I was thinking of buying a shore house but still think it is too high in price ? Am I correct in thinking it will down more ??

    • Hi Lynn, I think Canadian house prices will grow at a stable rate from here for the next decade and that there is going to be another boom in Alberta. As for US real estate, I am no expert but as an outsider I think there is still a couple years before prices there hit bottom. There are more foreclosures and loan losses to come and the economy is still struggling.

      Rather than trying your hand at timing the market, look for properties that make sense today based on strong cash flow. If you buy today with enough cash flow to hold on for the long term, you’ll start getting the cash flow and mortgage paydown and you’ll eventually see the appreciation down the road as long as you can hold on for a further dip over the next couple years.

  4. Thanks, I agree.. I have been reading a lot about our market and it still doesn’t look good yet.. It seems that it is still heading downward… :{
    I will keep my eyes open…but will wait for a while before I buy another home.

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