The Pathology of a Residential Real Estate Bubble and its Dramatic Consequences: An Emotional Rollercoaster

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 period from January 1994 to early 2007 house prices rose in excess of 500% and then in April 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 was exacerbated by groupthink behaviour on the part of all the major actors in the drama: property developers, bankers, politicians, regulators, the media, economists, estate agents as well as property investors and homeowners themselves. When the property bubble finally burst it had disastrous consequences not only for the housing market, but also for the banking system and critically the entire Irish economy.We argue that the models developed by standard economic theory, though highly mathematical and complex in nature, find it difficult to explain asset pricing bubbles and financial crises in any convincing way, and, in such models, the role played by emotions and social and group processes are largely ignored or consigned to the irrational. We suggest that repeated asset pricing bubbles can be viewed on one level as the inevitable consequence of investors’ unconscious search for transformational phantastic objects (Tuckett and Taffler, 2008) and the consequent emergence of basic assumption group behaviour. If the phantastic object itself pervades all the economic actors in society there may be no effective counterbalancing force to counter its emergence and, importantly, not be able to prevent its potentially dramatic wider economic consequences when the bubble it generates bursts. This happened in the case of the Irish residential property market bubble.We explore the role that emotions, in particular unconscious phantasy, may have played in firstly escalating and eventually pricking this bubble. This view of the world is consistent with Kindleberger and Aliber (2011), who though they couch their model of market bubbles in terms of human emotions, they do so without providing an underlying theory of the mechanism by which these emotions oscillate as the phases of their model unfold.