real estate bubble
  • What is the Real Estate Bubble, and What Causes It?

  • Published By:
  • Category: Real Estate
  • Published Date: August 22, 2023
  • Modified Date: September 4, 2023
  • Reading Time: 8 Minutes

Featured Image Caption: Real Estate Bubble

What is a real estate bubble?

A real estate bubble is an increase in real estate prices followed by a sharp drop in the price. It is pronounced in several ways, including the real estate bubble or the real estate bubble, and the most widely used word is the real estate bubble.

It is a type of economic bubble, but we will focus here only on real estate, where the bubble occurs when speculation rather than the actual need drives the demand for real estate.

Real estate prices rise and sometimes reach levels. It is not commensurate with the real property price in an unsustainable manner, and then it decreases.

A real estate bubble can lead to the bankruptcy of real estate investors and homeowners in the area where the bubble occurs. It can significantly harm the economy of the country itself.

Real estate speculation is a sign of the real estate bubble.

The process is a method of cash payment to accelerate transfers of ownership for resale within a short period.

Rapid real estate speculation makes real estate prices rise and sometimes reach levels. That is disproportionate to the real property price and is unsustainable, and then suddenly declines after that.

Driven by demand from buyers who speculate that they can sell the property at a higher price, this can lead to a sharp drop in prices. As buyers become unwilling or unable to afford the cost or continue to pay inflated prices, the market corrects itself through the decrease in demand and the return of prices to normal with no need.

How do you know the existence of a real estate bubble in your future investment site?

2- One of the most explicit indications of the formation of the real estate bubble can be deduced through a study:

Real estate prices:

This is due to the rapid rise in prices.

Low-interest rate:

The decrease in interest rates, which must accompany the increase in prices. The reduction in the interest rate in real estate markets in which real estate prices do not rise is evidence of the strength of frugality in them. It is part of a government plan to improve the population’s standard of living by securing real estate ownership at reasonable prices for them.

Lending criteria for the purchase of a property

Here it is the heart of the real estate bubble and a defining point in knowing the beginning of the real estate bubble. It is the cause of the real estate bubble.

As the real estate market in the whole world adopts the usurious lending system. That assumes the principle of real estate instalments in return for a significant financial profit stipulated by penal law.

Here, if we want to explain the main reason for the real estate bubble away from debt and to return to the state of reality, banks or real estate lenders adopt lending criteria for those wishing to buy a property.

This is done by obtaining allowance and social guarantees that protect them from the danger of the buyer not paying the value of the real estate and lax lending standards.

It means lending without a guarantor (physical substitute) as a mortgage or social security such as the job level or a person who reduces the risk value of this loan.

Demand for homes dwindled.

For population growth or other measures of demand. This stage can come in two cases: the market glut and weak liquidity. That is similar to inflation that is accompanied by a rise in prices for most commodities, and here the dwindling of demand is a comprehensive matter for all capital and economic drivers.

Significantly reduced lending standards are in line here. A real estate bubble is about to burst as banks suffer from a significant disruption in lending and repaying loans.

This leads to an increase in the risk of lending due to low lending standards and the reluctance of loan repayments to pay due to the lack of feasibility of the loan.

And here lies the great calamity, where many properties are seized due to non-payment and lack of demand. As a result, investors refrain or withdraw their investments from the real estate market due to a lack of profits and compensation for losses. So that the grains of the contract is imposed, followed by the bankruptcy of real estate developers in Dubai, real estate marketers, and sometimes lending banks.

Signs of a real estate bubble forming

Prices are rising rapidly, much higher than the inflation rate—the limited supply of real estate concerning the number of buyers.

Buyers buy real estate regardless of the basics (e.g. overpaying for a property not worth the price).

Property flipping (buying and selling real estate to make a quick profit) has become mainstream for those looking for a quick buck—an increase in approved mortgages with low down payments and poor credit standards.

A case study of the real estate bubble crisis of 2008

A real estate bubble caused the real estate market crash of 2008, where high-risk and irresponsible mortgage lending from banks increased the demand for real estate purchases without collateral, which led to an increase in the prices of real estate previously purchased by low-risk borrowers who were then reluctant due to the significant price difference to pay.

This led to the mortgaging of many real estate and, thus, the bankruptcy of lending banks. Then the real estate bubble that had existed years before in America burst, and prices collapsed, leading to foreclosures and a financial crisis.

The most prominent real estate bubble occurred in the United States between 2004 and 2006. That led to the collapse of the real estate market and the financial crisis in 2008.

This bubble was estimated to cost Americans more than 7 billion dollars of wealth, and several banks went bankrupt as dominoes fell. But the US government avoided the complete collapse by supporting the remaining banks.

The cause of the economic crisis in 2008

We will not call it a complete real estate bubble crisis but rather an economic crisis. That was forming within the real estate bubble, and what inflated this crisis to become global was caused. Some banks are greedy first as they lend and lower their lending standards.

The difference between the prices of similar real estate (even in the same neighborhood and with the exact specifications) is due to the need for more demand.

The fact that the United States of America is the centre of the global economy (the dollar) made the impact of this crisis extend to the rest of the world.

And, of course, the market, or as it is called, the cowardly capital. People rushed to withdraw their money from the banks for fear of it, which exposed empty safes in banks at the time because of the very high lending.

We may be in a real estate bubble right now. Prices have been rising rapidly in many markets, and there are concerns about lax lending standards. If prices start to fall, this could cause another financial crisis, according to a study by UBS Global Investment Consulting on many famous cities worldwide.

There is no direct answer about whether we are currently in a real estate bubble in a way that includes all countries. No one can predict the future, but you can select a specific area and study the possibilities of a real estate bubble.

About the real estate bubble, which may affect the global economy ultimately. Many factors indicate inflation in prices for some markets and could collapse in the near future. Such as the price increase in many markets significantly in the past few years. Especially in Hot markets such as Frankfurt, Toronto, San Francisco, Seattle and Boston.

Real estate speculation (real estate that is bought and sold within 12 months or less) has risen to pre-recession levels in the Corona period.

The number of mortgage debts is rising again, reaching an all-time high since 2017.

A large number of properties are purchased for cash. That may indicate that investors are buying properties speculatively.

Conclusion

The real estate bubble can have dire consequences. If you think a bubble is forming, always remember its reasons and compare them with the area where you want to buy a property.

  • The leniency of banks with loans in general (not just one bank)
  • Average market demand in exchange for concessions
  • The demand for leasing and leasing usually measures the population’s need

So be careful about buying real estate. Watch prices and lending standards, and always be vigilant before buying a property, just like any other investment.

We hope we have provided all the required information about the real estate bubble, as we have covered all its forms and history for more than half a century. In case of any inquiries, please comment or write to us to provide the required information.

And if you like the information mentioned above, we would like to share this article with those interested in everything related to the real estate bubble so that they can see it.

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