Property Bubble

Housing Bubble

What is a 'Housing Bubble'

A housing bubble is a run-up in housing prices fueled by demand, speculation and exuberance. Housing bubbles usually start with an increase in demand, in the face of limited supply, which takes a relatively extended period to replenish and increase. Speculators enter the market, further driving up demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices — and the bubble bursts.

BREAKING DOWN 'Housing Bubble'
A housing bubble is a temporary event, but it can last for years. Usually, it’s driven by something outside the norm such as demand, speculation, high levels of investment — all of which can cause home prices to become unsustainable. It leads to limited supply versus an increase in demand. According to the International Monetary Fund (IMF), housing bubbles may be less frequent than equity bubbles, but they tend to be twice as long. 

A financial bubble refers to a situation where there is a relatively high level of trading activity on a particular asset class at price levels that are significantly higher than their intrinsic values. In other words, a bubble occurs when particular investments are bid up to prices that are far too high to be sustainable in the long run.

Housing bubbles don't affect the real estate industry, but also have a significant effect on people of all classes, neighborhoods and the overall economy. They can force people to look for ways to pay off their mortgages through different programs or may have them dig into retirement accounts to afford to live in their homes. Housing bubbles have been one of the main reasons why people end up losing their savings.

What Causes a Housing Bubble?
Traditionally, housing markets are not as prone to bubbles as other financial markets due to the large transaction and carrying costs associated with owning a house. However, a combination of very low-interest rates and a loosening of credit underwriting standards can bring borrowers into the market and fuel demand. A rise in interest rates and a tightening of credit standards can lessen demand, causing the housing bubble to burst.

Credit to Investopia

Read more: Housing Bubble https://www.investopedia.com/terms/h/housing_bubble.asp#ixzz5MRW4IBnZ
Follow us: Investopedia on Facebook