A real estate bubble or a housing bubble is a phenomenon in the real estate industry that happens every few years. This may be on a large scale and an entire country may feel the pain of a real estate bubble bursting. The real estate bubble may burst in a city or even a small region of a country. So what is a housing bubble and what happens when such a housing bubble burst?
Housing or Real Estate Bubble
In housing or real estate market, prices keep rising all the time and there is no clear justification available for the continuous rise in property rates. When housing prices do not match the demand and supply factors or they exceed the justified market rate, the real estate industry is in a housing bubble. The sudden escalation of price in a particular asset that does not match the underlying value of the asset is a sign of a bubble. There are many signs of a real estate bubble which include an increase in mortgage activity and accumulation of housing debt. A real estate market is in a bubble when a real estate developer can sell property at rates rising much faster than the rent rates in the real estate market.
Real Estate Bubble Burst
In a real estate bubble, supply and demand dynamics are imbalanced. When demand is higher, investors invest in properties and rates keep rising higher. But supply usually catches up with demand and the imbalance corrects itself. When this happens, the rates crash and property value goes down dramatically. If however the property is bought using a mortgage or loan plan, buyers have to still keep paying back the loans and interest, even if the value of the property has greatly declined. People stop paying the loans and banks do not get their investment back even if they foreclose properties as rates have crashed. There is no demand in the market and vacant properties are available all over the market at crashed values as supply exceeds demand. Real estate bubble breaks every 13- 15 years. This can lead to a great financial crisis for not just real estate developer but also for the country.
Examples of Recent Real Estate Bubbles
There was a real estate bubble in the United States of America housing market in 2005-2007. The housing bubble burst in 2008 which lead to one of the great financial crashes and crises in the economy since the Great Depression of 1929. There was a Japanese Asset price bubble in 1990s that damaged their economy. Shanghai also went through a real estate bubble in 2005. The current Chinese and Indian real estate markets have seen a steady rise in real estate prices. Analysts fear that these economies could be headed for a real estate bubble to break, leading to financial crises.
Most countries in the world have gone through such real estate bubbles that have burst. That is why it is important for the banks and government regulators to control market rates before the bubbles burst in the real estate industry.Tags: Real Estate