Real Estate Bubble

A real estate bubble refers to an economic ‘bubble’ which can occur in the global or local real estate market. Usually, it follows a ‘land boom’ which is a rapid increase in the valuations of real estate and property until they reach an unsustainable level before they collapse.

A real estate bubble is difficult to identify because it cannot be correctly estimated.

Market Indicators

Economists have developed economic indicators which help people find out whether or not a home in a certain area is fairly valued. This helps people understand and indicate when an economic bubble might arise. Indicators generally describe two aspects of a housing bubble. There is a valuation and a leverage component. With the valuation component, the value of a house and how expensive it is can be measured. The leverage component how a household can become indebted when buying a house.

Real Estate Bubbles in 2000’s

In the year 2006, most of the areas in the world were believed to be in a housing bubble. Although, because this hypothesis stood upon observation of similar real estate market patterns of various countries of the world, it is still debatable. Some of the patterns include over evaluating and then borrowing a large amount, based on the overvaluations.

Steps of a Housing Bubble

Though there are different interpretations of the pattern leading up to a housing bubble, they are generally the same. A general pattern has stayed consistent over the years and is as follows:

  • Displacement
  • Usually, a displacement occurs when investors in a housing community or neighborhood become enchanted by something. This can be new technology or even interest rates that have proven to be of historically low ranking.

  • Boom
  • Typically, price rise at a slow rate after displacement. They gain momentum as more people enter into the market and let it flourish. This sets a stage for the ‘boom’, which is the next step of a housing bubble. Because so many people take part in it to gain a rare and beneficial chance, it grows at a faster rate.

  • Euphoria
  • Usually, in a bid to benefit from the opportunity, people do not exercise caution. During this time, valuation rate soar to unbelievable levels and new methods are created to keep up with them.

After the profit has been taken, the panic phase sets in. the real estate market declines as fast as it rose and investors are open to speculation about their plunging values of their assets.

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