A housing bubble, also known as a real estate bubble, emerges as a surge in housing prices driven by heightened demand, speculative activities, and exuberant spending, ultimately leading to a collapse. Typically, housing bubbles initiate with an increase in demand against limited supply, a situation that takes a substantial time to rectify. Speculators infuse capital into the market, intensifying demand. However, when demand wanes or remains stagnant while the supply increases, prices sharply decline, causing the bubble to burst.
While housing bubbles are transient, their impact can persist for years, often fueled by factors outside the norm, such as manipulated demand, speculation, excessive investment, liquidity surplus, deregulated real estate financing markets, or unconventional mortgage-based derivatives. These elements can render home prices unsustainable, creating a significant demand-supply imbalance.
According to the International Monetary Fund (IMF), housing bubbles, while less frequent than equity bubbles, tend to endure twice as long. The repercussions of housing bubbles extend beyond the real estate market, affecting individuals across various socio-economic classes, neighborhoods, and the broader economy. Such bubbles force people to explore various avenues to meet mortgage obligations, including utilizing different programs or delving into retirement funds to sustain their housing situations, often leading to financial strain and loss of savings.
Housing markets, traditionally considered less susceptible to bubbles due to substantial transaction and carrying costs, can succumb to such phenomena with a rapid surge in credit supply, marked by low-interest rates and relaxed credit standards. A subsequent rise in interest rates and tightening credit standards can trigger a decline in demand, precipitating the collapse of the housing bubble.
One notable example is the mid-2000s U.S. housing bubble, intertwined with the burst of the technology sector bubble. As the dotcom bubble of the late 1990s imploded, investors, abandoning the stock market, redirected their funds into real estate. Concurrently, the U.S. Federal Reserve’s efforts to counter the economic aftermath of the technology bust further contributed to the expansion of the housing bubble, ultimately playing a role in the financial crisis of 2007-2008.
