Answer by Juliana Ardila:
“There is a theory that the period of growth is shown by the difference between inflation (CPI) and the level of growth in the real estate market. This means that if property prices are growing faster than the (CPI) the market is experiencing a recovery or growth phase. If the difference is substantially different and this growth is holding for a long period of time (longer and possibly faster than the preceding recession), this is not sustainable and may be a sign of a price bubble.
If you would like to get a better understating of how the economy works, Ray Dalio, the billionaire founder and CO-Chief Investment officer of Bridgewater Associates made this really easy to understand video about this subject and it is definitely worth watching:
He explains how we have a series of short economic cycles produced by levels of debt have a period of Growth, Boom, Contraction, Recession and Recovery within a larger cycle showing the same phases usually lasting around 70-100 years.
My own notes about this:
Spending more now by acquiring more debt means less spending in the future because we have to repay that debt at a later stage. Large levels of debt and spending increases inflation and shows a booming economy, whilst getting ready for a period of contraction.
A burst of the bubble occurs when top levels of borrowing are reached and people cannot afford to over spend anymore but they keep borrowing anyway. This is why governments are trying very had to create laws that protect consumers and the economy from acquiring debt that they simply cannot afford. At least this is the case in Australia. My opinion is that the 2009 bubble was a result of the peak of the 70 year cycle, and while it is possible that this happens again, it will not be to the same extent. This is if Ray Dalio is right.
I hope this clears it up a bit. Do not hesitate to contact me if you have any questions. And as always, our best discussions happen in the comments section below.
With a grateful heart,
How The Economic Machine Works by Ray Dalio