Overcapitalisation 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

Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...

. This is especially the case when capital goods 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

Assets inflation

Asset price inflation is an economic phenomenon denoting a rise in price of assets, as opposed to ordinary goods and services. Typical assets are financial instruments such as bonds, shares, and their derivatives, as well as real estate and other capital goods.-Price inflation and assets...

. 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

In general use, esp. North American, 'real estate' is taken to mean "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; an item of real property; buildings or...

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

Ownership equity

In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...

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

Examples

In his book "Collapse

Collapse (book)

Collapse: How Societies Choose to Fail or Succeed is a 2005 book by Jared M. Diamond, professor of geography and physiology at University of California, Los Angeles...

", Jared Diamond

Jared Diamond

Jared Mason Diamond is an American scientist and author whose work draws from a variety of fields. He is currently Professor of Geography and Physiology at UCLA...

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

Australia

Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...

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

England

England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...

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