Overcapitalisation or Overcapitalization, refers to an economic phenomenon whereby the valuation/price of an asset is superior to its ‘real’ value, however difficult to define, therefore putting a strain on attempts to obtain a reasonable

return on investment Return on investment (ROI) or return on costs (ROC) is a ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favourably ...

. This is especially the case when

capital goods The economic concept of a capital good (also called complex product systems (CoPS),H. Rush, "Managing innovation in complex product systems (CoPS)," IEE Colloquium on EPSRC Technology Management Initiative (Engineering & Physical Sciences Researc ...

are at stake which are necessary to engage in the production of goods or delivery of services (e.g. agricultural holdings, industrial plants, etc.). It is less the case with those contemporary financial instruments that are valued not for their returns, but for their potential earnings upon resale. Overcapitalisation is closely related (in causes and consequences) to assets inflation. As the financialisation of the economy has led to the monetisation (also called ‘securitisation’) of many non-financial assets, such as

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

, infrastructure, etc., overcapitalisation has become rife, with deleterious consequences at the level of firms (struggling to achieve an unrealistically high level of profitability), households (struggling to pay their inflated mortgage), and individuals (whose

equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the diff ...

holding, and hence borrowing and repayment potential, may be vastly over-valued).

Examples

In his book "''

Collapse Collapse or its variants may refer to: Concepts * Collapse (structural) * Collapse (topology), a mathematical concept * Collapsing manifold * Collapse, the action of collapsing or telescoping objects * Collapsing user interface elements ** ...

''",

Jared Diamond Jared Mason Diamond (born September 10, 1937) is an American geographer, historian, ornithologist, and author best known for his popular science books '' The Third Chimpanzee'' (1991); ''Guns, Germs, and Steel'' (1997, awarded a Pulitzer Priz ...

gives an example of widespread overcapitalisation (Chapter 13, "Mining"

Australia Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With an area of , Australia is the largest country by ...

, paragraph on 'imported values') where he describes how settlers in Australia bought or leased land at prices derived from those at 'home' (

England England is a country that is part of the United Kingdom. It shares land borders with Wales to its west and Scotland to its north. The Irish Sea lies northwest and the Celtic Sea to the southwest. It is separated from continental Europe ...

), and then were pushed very hard (and usually failed) to achieve the necessary returns, wrecking the fragile resource in the process by

over-exploitation Overexploitation, also called overharvesting, refers to harvesting a renewable resource to the point of diminishing returns. Continued overexploitation can lead to the destruction of the resource, as it will be unable to replenish. The term ap ...

. Problems in business economics {{Econ-problem-stub