When people start saying 'this time is different' it's time to get worried...
How do you spot an economic bubble? Generally, you only see it when it pops.
Everyone who lived through Ireland's Celtic Tiger boom and bust will know what it feels like when 'good times' turn sour.
Bubbles form when the cash value of an asset rises at a rapid pace which becomes detached from any sort of intrinsic value which it holds. This is driven by speculation and investor sentiment.
Ireland's current rapid rise in property prices is being caused by a miss-match between supply and demand.
Low stocks of houses available to buy make them more expensive - but that doesn't necessarily mean there's no 'bubble' element to recent price hikes.
There is a saying in economics that when people start saying 'this time is different' it's time to get worried.
Well, this spike in house prices is different to the 00's edition. For a start, property prices across Ireland are still 30.7% lower than its highest level in 2007 according to the CSO. Dublin prices are 31.3% lower than the market's peak.
The residential market is certainly dysfunctional because of this miss-match - and its rocky foundations create uncertainty.
High levels of uncertainty lead to buyers and sellers gambling - which can add to an emerging boom's momentum.
For example, if you have a house which you could sell but you keep hearing about house price increases, you might be tempted to hold onto the asset in case the value keeps going up and you miss out on a bigger payday.
We are also still living with a hangover from the 00's boom. Developers are sitting on land which they bought at massively inflated prices during the Tiger years and deciding that house prices are not high enough to convince them to build (just yet).
Uncertainty at the core of the market also makes it harder for politicians and the Central Bank to create policies to stop a new bubble forming.
Politicians face pressure to get more houses on the market to take the bite out of the housing crisis and to keep voters happy. This can tempt them to push through pro-cyclical policies which could make any growing boom-forces boomier (like the Government's recent introduction of policies to help first-time buyers).
The market is broken, but it looks more like a prolonged fallout from the last crash, rather than a new fresh bubble - but it will be interesting to see if increased supply will take the heat out of the market.
If it doesn't it's probably time to start worrying...
If spotting bubbles were easy, then they probably wouldn't happen - but here are some stages to look out for:
Something new - A new investment prospect attracting a lot of cash often ends in a massive crash.
Company's like Snapchat, Uber and Airbnb will be interesting to watch. They are being sold as the future of their industries and have achieved massive valuations (Snapchat $28bn, Uber $69bn, Airbnb $31bn) without making profits - or showing clear paths to generating revenue in-step with these rising valuations.
They face a huge challenge to satisfy investor expectations and could be in the middle of a classic bubble cycle.
FOMO - When bubbles start to form investors are afraid of being left behind when there's money to be made - so they pile in.
Euphoria - Valuations hit extreme levels (think Irish property prices in the year before the crash).
Downfall - The shine wears off. Savvy investors realise a market is out of control and start to jump ship as values head south.
Fallout - We all sit around asking 'why didn't we see this coming' (and writing think pieces about how we'll spot the next bubble forming).