Nobel Laureate Robert Shiller Warns Of Bubble In US Equity Markets, Brazil Property Sector

   on December 02 2013 1:33 AM
Robert Shiller
Robert Shiller, one of three American scientists who won the 2013 economics Nobel Prize, attends a press conference in New Haven, Conn., on Oct. 14, 2013. Reuters/Michelle McLoughlin

Robert Shiller, one of three American economists who won the 2013 Nobel Prize, warned on Sunday that the recent sharp rise in equity prices in the U.S. is a dangerous development, and it could signal the building of a financial bubble.

Shiller, who co-created the closely watched S&P Case/Shiller Home Price Index, said he is concerned about sharp rises in stock prices, especially those in the financial and technology sectors, which he said are overvalued. Overvalued assets create bubbles as their prices get detached from their true worth, leading to the collapse of a sector.

"I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable," Reuters quoted Shiller as saying to Der Spiegel, a German magazine.  

The economist, who won the coveted Nobel Prize along with two other American economists -- Eugene Fama and Lars Peter Hansen -- for their research on asset prices, said that stock prices have soared in many countries, while the housing sector in countries such as Brazil have “drastically” high prices.

"I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets," Shiller said, according to Reuters. "That could end badly.”

He noted that house prices in the Brazilian cities of Rio de Janeiro and São Paulo, in the last five years, mirror the investment conditions that prevailed in the U.S. during the real estate boom.  

“There, I felt a bit like in the United States of 2004,” Shiller said, referring to investor sentiments he observed in Brazil's property markets.

The South American country is witnessing a real estate boom, with prices around the country up 200 percent since 2008. According to the FipeZAP Index, which follows prices of Brazilian housing for sale or rent, real estate prices have shot up 230 percent in Rio de Janeiro since 2008. For São Paulo, the rate is 188 percent.

However, Shiller, in a separate interview told Barron’s that he did not see any bubble in the U.S. housing property market, even though the home price index has soared 13.3 percent this year through September, Money News reported.

"We went through the biggest housing bubble in U.S. history in the 2000s, and there is a knee-jerk reaction among some people who think maybe we are doing that again," Shiller told Barron's.

"But you have to consider that these are very rare phenomena, and it was such a decisive break at the end of the last housing bubble that we might not be psychologically ready for another bubble," he added. 

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