A real estate bubble is an economic phenomenon that can occur locally, or in global real estate markets. Whatever the cause may be of its emergence, it is viewed as dangerous because of its potential to lead to an economic downturn. Therefore, it is important to refine your financial knowledge and vocabulary to have an edge in the property business. What exactly is a real estate bubble?
A ball thrown up will eventually come down. That is essentially a real estate bubble. When property values rise very quickly, economists agree that it is a sign of a real estate bubble and that when property valuation becomes so high and unsustainable the prices will plummet – like a bubble bursting.
When does a real estate bubble occur?
It all starts with a positive shift to the demand curve. This can be due to increase in population in a region, easy mortgage options, or low interest rates. This sudden rise in demand makes real estate developers try to make lucrative profits by building more properties, thinking the demand will keep growing. Speculators enter the market thinking they can profit in a short period of time, driving demand further. However, several factors can drastically cause the demand to drop.
What are the main reasons for the bubble to burst?
The three main reasons are:
- Loan – Housing loan programs inspire home ownership. The downfall of such scenarios befalls when borrowers fall behind in paying their monthly loan payments to respective banks, which is not uncommon.
- Employment – Developers keep building properties, expecting the demand to keep rising but this does not always happen. For example, when jobs on the market get saturated, or there is a general downturn in economic activity, people may start migrating to other cities or countries. If consumers have less disposable income overall, this can result in a number of unsold homes and offices.
- Demand meets supply – Demand and supply can reach equilibrium and the rapid price appreciation that homeowners were initially entering the market for will be absent; therefore, demand will take a nose dive, causing the bubble to pop.