Spotting bubbles: is farmland next?

• Author: Shiller, Robert J.

People frequently ask me, as someone who has written on market speculation, where the next big speculative bubble is likely to be. Will it be in housing again? Will it be in the stock market?

I don't know, though I have some hunches. It is impossible for anyone to predict bubbles accurately. In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion. A bubble forms when the contagion rate goes up for ideas that support a bubble. But contagion rates depend on patterns of thinking, which are difficult to judge.

Big speculative bubbles are rare events. (Little bubbles, in the price of, say, individual stocks, happen all the time, and don't qualify as an answer to the question.) And because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now.

But some places appear a little more likely than others to give rise to bubbles. The stock market is the first logical place to look, as it is a highly leveraged investment--and has a history of bubbles. There have been three colossal stock market bubbles in the last century: the 1920s, the 1960s, and the 1990s. In contrast, there has been only one such bubble in the United States' housing market in the last hundred years, that of the 2000s.

We have had a huge rebound from the bottom of the world's stock markets in 2009. The S&P 500 is up 87 percent in real terms since March 9 of that year. But while the history of stock market prediction is littered with too much failure to try to decide whether the bounceback will continue much longer, it doesn't look like a bubble, but more like the end of a depression scare. The rise in equity prices has not come with a contagious "new era" story, but rather a "sigh of relief' story.

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Likewise, home prices have been booming over the past year or two in several places, notably China, Brazil, and Canada, and prices could still be driven up in many other places. But another housing bubble is not imminent in countries where one just burst. Conservative government policies will probably reduce subsidies to housing, and the current mood in these markets does not seem conducive to a bubble.

A continuation of today's commodity price boom seems more likely, for it has more of a "new era" story attached to it. Increasing worries about global warming, and its effects on food prices, or about the cold...