And the Next Bubble Is … Education
Over the past 15 years, global investors have experienced a series of bubbles: the Internet bubble in 2001, the real estate and credit bubbles in 2008, and then gold this year. The expansions and adjustments of these bursting bubbles seem to have already become commonplace.
Though many governments with troubled economies have tried to face the problems in a comprehensive way, many are still struggling. The global wealth disparity continues to deepen, as the super rich compete for luxury real estate in cities like New York, Paris, London and Hong Kong, which may indeed be distorting the market again.
But there is another, relatively modest but far-reaching global investment bubble: education.
Different from financial and real estate assets, education belongs to the category of "soft" investments because it brings no immediate assets to the investor. The merchandise is instead knowledge, skills and, finally, a diploma. All these can be regarded as money-making tools. Nevertheless, the education bubble now taking shape shares many similarities with other busted asset markets in history.
First let's clear on how an investment bubble is formed: when a rapid, unsustainable value appreciation creates a herd mentality and fear from investors that they will miss the boat by not acquiring within a certain category of assets. Numerous are those who will even borrow money to "get on board," expecting to use this leverage to make profits. At the peak, people can't imagine that the rising values will come to an end. "This time it's going to be different … " It is the proverbial unsinkable Titanic.
And so, the current fever of investing in education appears to be heating up in such a manner. In particular, major cities worldwide can see this taking place. In London and New York, parents send their children to learn Chinese from a young age. In Beijing and Shanghai, parents scramble to send their kids to summer schools in America and Britain.
While Western parents admire the Asian image of "tiger mom," Asian parents look to send their children abroad to obtain a more comprehensive education in a less stressful environment. Whatever their nationality, all parents are willing to save or even borrow money in order to propel their offspring into elite schools and, hopefully, guarantee that they will be rewarded with a high income in the future.
The fact that many parents are trying to learn from other countries reflects the fact that many people have serious reservations about the education system in their own countries, and also their concerns about the requirements of a global economy and shifting employment market. Mid-level jobs are being replaced by technology, which forces more people to pursue high-end jobs simply to avoid the low-end jobs on the other extreme. On the macro level, many governments echo such doubts, aiming to cash in an "educational return" where better-trained labor will attract investment and create job opportunities.
For instance, Britain is readapting its national education curriculum to ensure its students' international competitiveness. Britain's education secretary, Michael Gove, is paying close attention to global trends, making repeated references to "the world's most successful education systems," such as those in Hong Kong, the U.S. state of Massachusetts, Singapore and Finland.
Meanwhile, the education focus in Hong Kong is extending from classrooms to extracurricular activities, attaching new importance to giving children multiple skills. In Germany, it is not obligatory for children to go to school until they are seven years old. Lots of people believe that this is beneficial to their offspring's health and Germany's economic strength. However, even Germany is reconsidering the prospects for fear it could undercut the next generation's competitiveness. It seems that everybody feels the educational grass is always greener somewhere else.
References to successful education systems are increasingly based on an international test such as the Program for International Student Assessment (PISA) run by the Organization for Economic Cooperation and Development. This evaluation compares 15-year-old pupils worldwide for their reading, mathematics and science abilities. In 2009, students from Shanghai, Hong Kong, South Korea, Singapore and Finland led the pack. The latest result will be released later this year.
Interestingly, in Britain, though students' test scores have not changed much, their ranking on the PISA list is sliding because other countries are advancing. Indeed, around the world, and in particular in Asian countries such as China, an increase in education investment has raised the global standard.
Such intensity of investment and improvement in standards coincides with the global economy entering an extended period of low growth. This means demand exceeds supply. More people are competing for fewer high-paying jobs – and governments and parents alike are fighting for more education investment, particularly in early years.
Just like a property bubble, when demand exceeds supply, this means an even greater need for education. But this is particularly intense at the "high end." In the United States and Britain, leading universities and elite boarding schools are more sought after than ever. Like luxury properties in New York, London and Paris, a diploma from a prestigious school is believed to be a sound and stable investment. Generally, these diplomas do help open doors to "blue chip" companies – although, as Google has found, diplomas and school scores have little to do with long-term performance.
When the Bubble Bursts
How will the education bubble burst? With other assets, the price tends to rapidly collapse. However, as education isn't a typical financial asset, the adjustment will probably be different. Tuition fees at Tsinghua University and Harvard are not going to shoot up or down like real estate prices in China or the United States.
Nevertheless, a bubble can appear in the "target cost" – sending children to complementary courses, summer schools or overseas study tours, and hiring private tutors and college application advisors. Parents are like property investors. They are afraid that their children will be left behind so they spare no expense.
When waking up from the dream, parents will find out that their huge investment won't be rewarded, whether because their children haven't made it to the schools they aspired to or because they can't find an ideal job. This all means the "return" is worse than expected and that the "value" of elite education or prized diploma has been overestimated.
Experience tells us that predicting when a bubble bursts is a tricky exercise. Irrational investments can carry on for years. Investment in education in many countries is still hot and spreading because of a lack of other investment opportunities that will improve employment prospects. However, what is sure is that when the education bubble bursts, the monetary and psychological damage will be immense.
The author is an independent commentator who has worked for Goldman Sachs and Fidelity Investments
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