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Housing Bubbles Explained

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Why is there a housing bubble? Is it a good time to buy, sell, or wait until the bubble burst?

Bubbles are fragile. Battling for survival against the elements, you don’t know how long they’ll last. The same is said of housing bubbles – they, too, can provide joy and heartbreak.

This article looks at the conditions of housing bubbles, their causes, and their effects.

Causes Of A Housing Bubble

When there’s a steep rise in property sales prices fuelled by unsustainable activities, it’s called a housing bubble.

Some of the activities that drive up property values, i.e., housing inflation, include:

  • Economic stimulus (QE – Quantitive Easing)
  • Over-spending
  • Low interest rates and other incentives, e.g., stamp duty moratoriums.
  • Increase in demand
  • Fear of missing out
  • Speculation


Printing of money to stimulate economies fuels inflation. Global housing markets and share prices are overheated. There are housing bubbles just about everywhere you look. Europe, the UK, the USA, Australia, Canada, Asia, and New Zealand are recording property prices off the charts.

The pandemic stimulus packages have let the good times continue while preventing economic meltdowns. However, the bubbles will burst when the stimulus packages end.


Overspending large-scale construction projects are stimulating housing sectors, albeit in the right way. Most regions would say they lack the supply of homes to meet demand. An imbalance of supply and demand fuels housing bubbles, so adding to the supply is a good move when the stock is affordable.

Low-interest rates

Low-interest rates have improved loan affordability. When the interest rate is hyper-low, repayments are affordable on larger loans. Property developers, homeowners, prospective homebuyers, and property investors borrow more to secure the project or home they want.

However, competition is fueling property price growth, and the fear of missing out pushes borrowers outside their comfort zone, with household debt bursting at the seams.

More debt equals more income for the lenders, i.e., the banks.

Property Speculation

Speculation is rife. When homes increase in value by $10,000 or $20,000 a month, property speculators with the means to purchase, buy, and sell repeatedly add to the housing bubble or ‘epic’ bubble.

Winners and Losers of Housing Bubbles

There are winners and losers of housing bubbles.



As investors cash in by selling their rental properties, renters can lose out in housing bubbles. Less rental properties in the market can increase rent rates as demand outstrips supply.

With the pandemic, renters have had a reprieve with rent moratoriums. When landlords can increase rents again, renters may find rent affordability more challenging.


Selling a home in a property market bubble achieves a higher-than-expected sales price, making it a great time to sell.

The seller is a winner. Property investors and homeowners want to sell when they can get more for their properties.


Purchasers can also be winners when their home value holds firm once the bubble has burst. Buying a property is a long-term investment, and the owner needs to have the means to service the loan as interest rates rise.

When housing bubbles burst, property values can dive while interest rates increase—the opposite of a bubble where interest rates are low and property values are high.

Job security is uppermost when the bubble bursts. Servicing repayments that now cost more due to higher interest rates also determines whether buying a home in a bubble makes you a winner or a loser.

Property Investors

Property investors usually have the means to afford repayments when interest rates rise. Unlike homebuyers competition for a home for their use, property investors factor in affordability with higher repayments, and they don’t buy if they can not afford it.

Lenders can call in loans and sell the property to raise funds. Mortgagee sales can leave stricken homeowners—and sometimes homeless—without their initial deposit or downpayment if their property sells for far less than they paid.

First Home Buyers

Many first-time homebuyers are locked out in a housing bubble. While this is frustrating, they are better off waiting until the bubble has burst when a house price adjustment – i.e., a return to a realistic value for the right first homebuyers to get on the property ladder.

Cooling Measures

Housing bubbles cause joy and pain. Factors that cause bubbles can also be controlled with intervention to cool the market. For example, buyers must contribute higher down payments or deposits when LVRs (loan-to-value ratios) increase. Plus, rising interest rates result in borrowers qualifying for more modest loans. Overspending will stop, too, when there is less money in circulation, i.e., no quantitive easing.