What is an asset price bubble, and why is it dangerous to the economy?
Answer (1)
An asset price bubble happens when the price of something—like real estate, stocks, or even gold—rises quickly to levels that are much higher than its actual or "real" value. This rapid increase in price is often caused by excitement, speculation, and the belief that prices will keep going up forever. But bubbles eventually “burst,” which means prices suddenly crash. When that happens, a lot of people lose money, and it can hurt the whole economy.One of the most famous asset bubbles was the U.S. housing bubble in the mid-2000s. Because of low interest rates and easy loans, many people bought houses they couldn’t afford. Banks gave out subprime mortgages, and investors kept buying those risky loans. House prices kept going up, and people believed it would never stop.But it did. When prices became too high and borrowers couldn’t repay their loans, the housing market collapsed. Many people lost their homes. Banks and investors lost billions. This helped start the global financial crisis in 2008.In the Philippines, we can see signs of mini-bubbles in places like Metro Manila, where condo prices rise quickly. If too many condos are built and not enough people buy or rent them, prices could fall. That would hurt the construction industry, developers, and banks.Asset bubbles are dangerous because they give people a false sense of wealth. People borrow and spend too much based on the belief that their asset will keep increasing in value. But when the bubble bursts, they are left with debt and losses. Businesses close, people lose jobs, and the economy slows down.That’s why governments and central banks must watch asset prices carefully. If prices are growing too fast, they can use tools like interest rates or tighter lending rules to prevent a bubble from forming.
