Investment Week counts down nine of the worst speculative bubbles in the history of financial markets, and wonders which one could be next...
10. Tulip mania
During the 17th century, the Golden Age for the Netherlands, what was arguably the first recorded speculative bubble formed.
Contract prices of tulip bulbs, which at the time were a highly-coveted luxury item, reached incredible highs, with a single bulb fetching ten times the annual income of a skilled craftsman at the bubble’s 1637 peak, according to some estimates.
However, some academics contend this price speculation was not severe enough to qualify as a true bubble, because the price of tulip bulbs would need to have become unhinged from their intrinsic value.
And one more set to burst...?
9. Spanish property
Spanish real estate prices climbed between 1985 and 2008, tripling between 1985 and 1991, and doubling between 2001 and 2006.
The boom was driven by low interest rates, rapid growth in the construction sector, and easily accessible private sector credit.
Prices in the overheated property market began to fall in the late 2000s, and construction rates in Spain fell off a cliff in 2007-2008.
Many British ex-pats and retirees that had moved to Spain in search of their dream ‘place in the sun’ suffered heavy losses when the bubble burst.
After a decade-long bull run for gold, what was arguably a bubble in the commodity may have already burst.
Gold prices have quadrupled in the last 10 years, climbing an average 17% per year. Its meteoric rise was driven partly by demand from exchange-traded funds (ETFs) and, more recently, its status as a safe haven asset. There have been huge inflows into gold from investors spooked by events in the eurozone.
But between October 2011 and January 2012 gold has come off more than $300 an ounce, the largest short-term drop in more than 20 years, raising the question – have we already seen the top of the market?
7. Chinese property
Asian fund managers have been warning of a bubble in the Chinese property market for some time. Both the residential and commercial real estate sectors have seen their values soar over the last few years, driven by government policy and aspirational consumers.
Average house prices tripled between 2005 and 2009, according to some estimates, and price to income ratios remain elevated at approximately 40 times earnings.
Construction has continued at a rapid pace, leading to supply far outstripping demand, so that today many properties stand empty in Chinese cities.
However, some commentators deny there is a bubble in the sector, pointing to relatively conservative patterns of mortgage lending and rising wages.
6. Japan crisis
The Japanese asset price bubble which formed between 1986 and 1991 saw property and equity prices become vastly inflated.
When the central bank hiked interest rates in 1989, the stock market crashed, with the collapse in asset prices lasting more than a decade.
It also resulted in a wave of toxic debt which crippled the banking system and led many institutions to seek a government bailout. This period in Japan’s economic history is often referred to as the ‘lost decade’.
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