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Housing Bubbles Explained

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Why is there a housing bubble? Is it a good time to buy or sell or should you wait until the bubble bursts?

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

In this article, we look at the conditions of housing bubbles, their causes and 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

Stimulus

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, UK, USA, Australia, Canada, Asia and New Zealand are recording property prices off the charts.

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

Over-spending

Overspending on large scale construction projects is 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, i.e. repayments are affordable on larger loans when the interest rate is hyper low. Property developers, homeowners and prospective homebuyers including 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 is pushing 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 time and time again adding to the housing bubble or ‘epic’ bubble.

Winners and Loser of Housing Bubbles

There are winners and losers of housing bubbles.

Renters

Renters can lose out in housing bubbles as investors cash in by selling up their rental properties. Less rental properties in the market can result in increasing 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.

Sellers

Selling a home in a property market bubble achieves a higher than expected sales price. Hence it’s 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

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 rate 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 are also a factor in 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 get their funds. Mortgagee sales can leave stricken homeowners – homeless and without their initial deposit if their property sells for far less than they paid for it.

First Home Buyers

Many first homebuyers are locked out in a housing bubble. While this is frustrating, they are better off waiting until the bubble has burst when there is a house price adjustment – i.e. a return to a realistic value-is 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, when LVRs (loan to value ratios) increase, buyers must contribute more deposit. 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.

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