The Irish Real Estate Bubble: A Behavioral Finance Perspective

Between the mid- 1990’s and the mid- 2000’s, in a period characterized as the Celtic Tiger, the Irish residential real estate market experienced a boom. During the 13 years from 1994 to 2007 house prices rose in excess of 400% and then in September 2007 they started to collapse with a sustained decline continuing for almost six years eventually stabilising in March 2013. From peak to trough this fall was in excess of 50% and in modern times is second only to Japan in terms of magnitude. This series of years of steady price rises accompanied by sustained price declines constitutes a classic speculative bubble which, when it finally burst, had disastrous consequences not only for the housing market, but also for the banking system and the entire Irish economy triggering eventually triggering a bailout from the IMF, European Commission and European Central Bank. This paper explores the role that individual’s emotions potentially played in firstly escalating and eventually pricking this bubble. To do this we conduct a textual analysis on official reports (including IMF and OECD reports) as well as commentary on the real estate market as reported in the media as prices firstly escalated and eventually declined. We also perform a textual analysis of the official reports that were commissioned after the collapse to investigate their analysis of the causes of the bubble. Our findings are consistent with Kindleberger and Aliber (2011) who couch their model of market bubbles in terms of human emotions, though the official reports into the causes of the crisis were largely silent on emotions as a primary driver. Our results have implications for the effectiveness of official policy responses to prevent a similar bubble emerging in the future