What Is A Real Estate Bubble?
A real estate bubble is a sustained but unsustainable situation of over-priced properties marked by a sharp spike in the value of housing motivated by demand, speculation, and exuberant spending till the limit is exceeded.
It is very volatile and inconsistent resulting in a termination of the cycle referred to as a ‘bubble burst’
A real estate bubble is also referred to as a housing bubble.
The process entails increased demand, limited supply, increased cash investments- which drive further demand, and with the decline starting from stagnation to eventual regression, supply outstrips demand resulting in a drop in prices.
The housing bubble, like any other bubble, grows until there is a realization by investors that the assets’ prices are higher than the justifiable limits leading to devaluation that might lead to a market crash.
Speculative bubbles are also possible where projected value increases and price appreciation is seen in consumer goods, oil products e.t.c. as such, demand increases in an unusual manner.
The ‘boom period’ precedes a ‘bust period’ where demand is reduced but production capacity is much improved resulting in a fall off in the prices.
Deregulated real estate financing, excess liquidity, and extreme forms of mortgage-based derivative products all lead to the bubble.
The bubbles have a domino effect in that the crash transcends real estate and affects individuals across several social classes and consequently, the economy.
To help people pay off their mortgages, they find other alternatives including their savings to afford their dream homes.
Real Estate Bubble Example
In the mid-2000s, there was a housing bubble caused by the issuance of subprime loans by banks in the United States leading to frenzied purchases as borrowers were not financially buoyant, had bad credit, and were largely unemployed. The housing prices thus shot up by as much as 100%. Borrowers could not keep up with loan repayments and a lot of the homes were in foreclosure as such, housing prices dropped drastically, destroying the value of the loans and causing the market bubble to burst. By 2007, the entire country was in a recession.« Back to Glossary Index