Real Estate Bubbles and Urban Development

Asian Development Review 34:2

38 Pages Posted: 25 Aug 2017

See all articles by Edward L. Glaeser

Edward L. Glaeser

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 23, 2017


Real estate booms have regularly occurred throughout the world, leaving painful busts and financial crises in their wake. Real estate is a natural investment for more passive debt investors, including banks, because real estate’s flexibility makes it a better source of collateral than production facilities built for a specific purpose. Consequently, passive capital may flow disproportionately into real estate and help generate real estate bubbles. The preference of banks for more fungible real estate assets also explains why real estate is so often the source of a financial crisis. Real estate bubbles can be welfare enhancing if cities would otherwise be too small, either because of agglomeration economies or building restrictions. But given reasonable parameters, the large welfare costs of any financial crisis are likely to be higher than the modest benefits of extra building.

The benefits of real estate bubbles are welfare “triangles,” while the costs of widespread default are welfare “rectangles.”

Keywords: agglomeration economies, financial crises, real estate bubbles

JEL Classification: G15, R10, R30

Suggested Citation

Glaeser, Edward L., Real Estate Bubbles and Urban Development (August 23, 2017). Asian Development Review 34:2, Available at SSRN:

Edward L. Glaeser (Contact Author)

Harvard University - Department of Economics ( email )

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