A Bubble Wrapped in Euphoria: Why Real Estate and Everything Else Is in Trouble
Market Commentary | Systemic Risk | Global Macro Perspectives
“When I see a bubble forming, I rush in to buy—adding fuel to the fire. That’s how I make money. But I also know I must be the first to get out when the music stops.”
—George Soros
We are living in an age of unprecedented credit expansion. This is not just a real estate bubble it is an everything bubble, fueled by years of ultra loose monetary policy, suppressed interest rates, and investor psychology that has been completely detached from fundamental valuation anchors.
Housing is simply the most visible face of the storm. But like Japan in the 1980s, today's real estate frenzy is just a symptom of a deeper disease: speculative euphoria, enabled by cheap credit.
Real Estate Bubbles Are Not About Bad Loans They’re About Cheap Money
There’s a widely held belief that real estate bubbles only occur when banks issue subprime mortgages to people who can’t afford them. This was the dominant narrative after the 2008 Global Financial Crisis, where “NINJA” loans—No Income, No Job, No Assets became a symbol of excess.
But history says otherwise.
Japan’s 1980s real estate bubble was built on pristine credit. Borrowers were solvent. Balance sheets looked healthy. The problem wasn’t borrower risk—it was lending volume. Easy money poured into land and stocks, not because people were reckless, but because the price of credit had been distorted by central planners.
The Bank of Japan’s decision to keep interest rates near 2.5% while the economy was booming lit a fire under land prices.
Within four years, real estate prices in Tokyo tripled, and by 1989, the land under the Imperial Palace was worth more than all of the real estate in California.
Sound familiar?
From 2020 to 2022, housing prices in U.S. metros such as Austin, Boise, and Phoenix rose 50–100% in under 24 months. This was not driven by demographics or wage growth. It was cheap credit combined with speculative mania.
Japan's Bubble: A Postmortem
The Setup: Plaza Accord, Easy Money, and Financial Deregulation
In 1985, the Plaza Accord led to a sharp appreciation in the yen. Japan, fearing deflationary pressures from a stronger currency, loosened monetary policy. The BOJ cut the official discount rate from 5% in 1985 to 2.5% by 1987.
Simultaneously, deregulation allowed banks to lend more freely. Land became collateral, credit flowed with little restriction, and prices detached from economic fundamentals. Between 1985 and 1990:
Commercial land prices in Tokyo tripled.
Residential land rose 80%.
The Nikkei 225 surged from ~13,000 to nearly 39,000.
Crucially, this bubble wasn’t built on subprime debt. It was built on abundant, cheap, high-quality credit.
The Peak and Lagged Collapse
In May 1989, the BOJ began tightening. But real estate did not crash immediately.
The official rate increased gradually, peaking at 6% by August 1990.
Land prices peaked in 1990, yet the crash unfolded over years, with commercial real estate falling continuously into the late 1990s.
It wasn’t a sudden collapse. It was a slow rot that hollowed out Japan’s economy.
Firms that had shifted focus from productivity to asset speculation buying land because it appreciated faster than core business margins were left holding overpriced collateral. The bust wiped out balance sheets, creditworthiness, and ultimately, economic momentum for a decade.
Timeline: Japan’s Real Estate Bubble and BOJ Tightening
1985 – Plaza Accord
Major industrial nations agree to depreciate the U.S. dollar.
The yen strengthens sharply, and Japan faces export pressures.
BOJ responds by slashing interest rates to stimulate domestic demand.
Low interest rates + deregulated banking = massive credit expansion.
1986–1989 – Bubble Mania
Property prices skyrocket.
In Tokyo, commercial land prices rise ~300% from 1985 to 1990.
Stocks also surge: The Nikkei reaches ~39,000 by Dec 1989.
Corporations speculate heavily in land; banks lend against inflating collateral.
May 1989 – BOJ Begins Tightening
The BOJ raises the official discount rate from 2.5% to 3.25%.
Further hikes follow through 1990, reaching 6.0% by August 1990.
🔔 Despite tightening starting in mid-1989, real estate prices continued rising into early 1990.
1990–1991 – The Crash Begins
Stock market collapses first: Nikkei drops from 39,000 to ~20,000 within a year.
Real estate prices peak in 1990, but don’t fully collapse until 1991–1992.
Commercial land prices begin their long descent. Residential lags but follows.
There Was an 18–24 Month Lag Between Tightening and Real Estate Collapse
This lag is critical to understand because:
Markets can remain irrational longer than monetary tightening can appear effective.
Real estate is illiquid and sticky — prices don’t fall overnight like stocks.
Sellers resist lowering prices; buyers freeze; transactions collapse before prices do.
In Japan’s case, prices peaked in 1990, but many assets didn’t hit bottom until late 1990s or even early 2000s. That’s what made it a "Lost Decade" — the unwinding was long, drawn-out, and painful.
The American Echo: 2020-2022
Unprecedented Credit Expansion
In response to COVID-19, the Federal Reserve:
Slashed interest rates to zero.
Purchased over $4 trillion in assets.
Backstopped corporate bond markets.
Enabled the largest fiscal transfer in U.S. history via stimulus checks and PPP loans.
The result?
Mortgage rates dropped below 3%.
Real estate became the easiest way to front-run inflation and gain leverage.
Investor purchases surged. In some markets, 1 in 3 homes was bought by institutional or speculative capital.
This wasn’t just about shelter. It was about financial arbitrage.
Price Detachment: Speculative Psychology
Let’s break down a few examples:
In Austin, median home prices went from ~$335,000 in 2019 to over $650,000 in mid-2022.
In Boise, prices doubled from ~$250,000 to $500,000+, despite income growth lagging significantly.
In Phoenix, bidding wars were so intense that homes often sold for 20-30% over asking price, sight unseen.
These price moves were not driven by wage growth. They were driven by the unprecedented availability of cheap credit, which created an environment where buyers could easily outbid each other. That’s classic bubble behavior. The belief was: buy now or be forever priced out.
What’s more, housing demand was artificially inflated by this credit expansion. It wasn’t organic; it was a demand pull caused by borrowers chasing artificially low monthly payments, not because they needed homes. And the reason inventory remains so tight? Ironically, it’s also because of cheap credit homeowners locked in ultra-low mortgage rates and now refuse to sell, creating an illusion of scarcity in the face of waning demand.
This is a critical misunderstanding in the mainstream. Many still believe bubbles require bad lending standards "NINJA loans" to form. But this belief misses the essence of what a bubble is. A bubble is when asset prices decouple from fundamentals due to speculative behavior fueled by liquidity, not necessarily low credit quality. Japan’s pristine credit bubble proves this. The U.S. just had its own version, only bigger.
Cheap credit doesn’t only inflate prices. It masquerades as real demand. It gives the illusion of housing need when what we’re actually seeing is financial engineering. When the Fed raised rates, this "demand" evaporated almost instantly. Mortgage applications fell off a cliff. Buyer traffic dried up. This isn’t real demand it was borrowed demand from the future, conjured by artificially low rates.
Even more emblematic of speculative mania was the explosion in Pokémon card prices. A piece of cardboard with no productive utility only nostalgia and scarcity selling for hundreds of thousands of dollars is the purest distillation of a bubble: when fundamentals diverge completely from utility. In a world where money is free and expectations are untethered, everything becomes a speculative asset.
The Lag Before the Fall
Here’s the key insight: real estate bubbles don’t pop immediately when tightening begins.
The Fed began rate hikes in March 2022.
But as of 2025, many U.S. metros have only seen mild corrections.
Affordability is at 40-year lows. Transaction volumes are collapsing. But sellers are still anchored to bubble-era prices.
This is exactly how Japan looked in 1990-1992.
First comes the liquidity freeze. Then the slow repricing. Then the collateral markdown. And finally, the credit contraction.
What Comes Next?
Homebuilders will struggle to sell at prices that justify their costs.
Leveraged investors will seek exits, but buyers are gone.
Municipal budgets, reliant on inflated property tax bases, will face funding gaps.
Banks with CRE exposure will experience rising defaults.
And worst of all, a generation that believed housing was a one-way bet will begin to question the premise.
Conclusion: The Lessons of Japan
Japan teaches us that credit quality doesn't matter if the volume and velocity of credit expansion distort asset prices.
It also teaches us that once speculative psychology sets in, the bust will take years to unfold.
We are not headed for a repeat of 2008. We are headed for something slower, crueler, and more insidious: a long unwind of everything we thought we owned.
The bubble is not just in real estate. It’s in our belief that central banks can prevent gravity forever.