A real estate, housing or property bubble is a type of economic bubble, which occurs due to rapid increases in property prices, until they reach unreasonably high levels and then start to decline.
What are the effects of a real estate bubble?
According to an economic perspective, real estate bubbles result in a temporary increase and redistribution of wealth. The property owners who bought real estate when prices were low and sold during the bubble, benefit from it. Those owners who bought before the bubble, but did not sell their properties, are not affected . On the over hand, those who bought during the bubble, and sold after it burst, suffer a loss.
What causes a real estate bubble?
Real estate bubbles are caused by a variety of factors. The most popular beliefs are as follows:
- Increased availability of credit: With an increase in credit available for borrowers, people borrow excessively and invest in real estate. This results in an increase in demand, leading to an increase in prices, with static supply. Over time, demand decreases and supply increases, which results in a sharp decline in prices and so the bubble bursts.
- Irrational beliefs: Optimistic and irrational beliefs of property investors about future price appreciation of properties can also result in a real estate bubble. This leads to spectators investing in the real estate market, with the belief that profits can be made through short-term buying and selling. This further increases demand, hence causing a bubble to form.
- Prosperous economy: An increase in the general economic activity of a country makes its inhabitants wealthier, with more income in their pockets and hence they spend more. Combined with low interest rates in the economy, properties become more affordable and eventually this can lead to a bubble.