Housing Bubble

Posted in Finance, Accounting and Economics Terms, Total Reads: 334
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Definition: Housing Bubble

Housing bubble is an economic scenario which gets created in a region or a country, when their is a periodic rise in prices of real estate or property. It occurs after a period of time when the value of land, property, houses etc keeps on growing substantially.


A tremendous increase in housing prices which may be enforced by demand or unnecessary speculation and the belief among the people that recent history is best to understand the future. Increase in demand is what actually starts a housing bubble causing a shift in the demand curve to the right, while the supply remains constant since it takes a considerable length of time period to renew and increase.


Then the speculators enter the market, who expect that gains can be made using short-term buying and selling. This has a ripple effect leading to a further increase in demand. After a point, demand starts decreasing resulting in a leftward shift of the demand curve, or may become constant whereas the supply increased, which results in a sharp fall in prices - and thus the bubble bursts.


Historically, housing markets are not so much prone to bubbles as other financial markets are due to huge amounts of transactions and carrying costs which are incurred with owning a house. Nonetheless, a combo of extremely low interest rates and credits becoming loose lead to underwriting standards and this would then bring borrowers into the market, increasing the demand. An increase in rate of interest and keeping the standards of credit tight would help in weakening the demand, leading to a burst. Some other general socio-economic and cultural trends can also inflate and burst a housing bubble.


Now comes the question of identifying and preventing real estate bubbles, and if these bubbles have major economic significance have been answered differently by different schools of economic thought. The global financial crisis of 2007–08 as shown in the figure below (of US housing prices), was in a large way related to the bursting of housing bubbles around the world, which had already started during the 2000s.


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