Real Estate Bubble Driven Economical Crisis in Latvia and Possible Developments Correlating Events with Crisis in Sweden During 1990s

Theory
INVESTMENTS AND CONJECTURES (BUSINESS CYCLES AND REAL ESTATE)
According to Bodie et al6, investment is the current commitment of money or other resources in the expectation of reaping future benefits. There are five general investment principles7
• There is a systematic process of making real estate investment decisions; :
• The investment process is applicable for property throughout the world;
• Investing is the sacrifice of certain cash outflows for uncertain cash flows;
• The success of any real estate investment depends upon the timing, magnitude, and riskiness of its expected cash flows; • Real estate involves risky investments.
The value of an investment can be broadly defined as the present worth of the future benefits from owning an investment. Thus value represents the present worth of the income that an investment is expected to generate8Historically economy experiences periods of expansion and contraction, although the length and depth of these business cycles can be irregular. As the economy passes through different stages of the business cycle, the relative profitability of different industries might be expected to vary. Attractive investment choices rarely are obvious. It usually is not apparent that a recession or expansion has started or ended until several months after the fact. With hindsight, the transitions from expansion to recession and back might be apparent but it is often quite difficult to say whether the economy is heating up or slowing down at any moment . 9The objective of wealth maximization does precisely that if the measurement of additions to wealth is robust enough. The model of net present value of equity is a tool applied to manage wealth maximization. It indicates how much wealth the investor receives as a result of purchasing the investment. Therefore, with the net present value model, investor can feel confident that choosing projects according to the results of the model will yield the highest returns possible, on an expected basis, taking into account cash flow, appreciation, leverage, managerial expenses, inflation, and other concerns. In addition, the model can take into account risk preferences of different investors, as well as various risk levels of different projects. Thus, the model is well suited for investors seeking to maximize their wealth positions through investment in real estate10Given the cyclical nature of the business cycle, it is not surprising that to some extent the cycle can be predicted. The forecasts determine market response because in efficient market security prices will reflect market expectations. Once the analyst forecasts the state of the macro economy, it is necessary to determine the implication of that forecast for specific industries. Not all industries are equally sensitive to the business cycle.. 11 Investors should not always prefer industries with lower sensitivity to the business cycle. Firms in sensitive industries will have high-beta stocks and are riskier. But while they swing lower in downturns, they also swing higher in upturns.12
TYPES OF INVESTMENTS While several kinds of investments differ in many ways, they share one key attribute that is central to all investments: something of current value is sacrificed, expecting to benefit from that sacrifice later.13…