AS Macro Key Term: Bubble

A bubble is said to happen when the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble “bursts”). Typically this is seen in property markets where housing valuations can rise to unsustainable levels relative to income or long-run average prices. Speculative demand driven by positive price expectations has the effect of amplifying market demand and driving prices higher - especially when supply is restricted and unresponsive to short-term price movements.

Bubbles are common in other asset markets such as for stocks and bonds. And increasingly we find that world commodity prices exhibit bubble tendencies with high levels of volatility in the prices of foodstuffs, oil and natural gas and metals.

The bursting of a bubble - such as a collapse in property prices - can have important demand-side effects on wealth, confidence and aggregate demand