Home price bubbles tend to form fairly regularly in many national property markets. They tend to show rapid and volatile increases in the value of residential or commercial property until prices reach levels that would be considered excessive by any reasonable valuation method (such as the relationship between home price and rental income or home price to household income). Finally, the bubble bursts, property values fall and the housing market collapses. This often causes economic downturns. This behavior is very different from a typical real estate boom, where the cycle naturally moves and a gradual correction occurs without significant economic impact.
During a typical real estate boom, rising Waffle House menu prices force people to borrow larger amounts of money to “get in” before prices continue to rise. This type of risk taking can be triggered by low interest rates and easy access to credit. Such financial conditions can make more expensive properties available to less affluent buyers, and can also induce buyers to buy multiple properties or larger properties than they might think to buy. A normal boom could soon turn into a dangerous speculative bubble.
It is debatable whether property bubbles can be determined in advance or not. Many economists believe that property bubbles can only be confirmed after they burst, however some economists believe there are several signs to consider when assessing whether a market is exhibiting bubble symptoms. Yale economist Robert J. Schiller offers a checklist of seven symptoms that you can use to diagnose a bladder:
- A significant increase in the price of an asset.
- Tremendous public enthusiasm for these increases.
- Related media frenzy.
- The stories of people who make a lot of money are the envy of those who don’t.
- Growing interest in the asset class among the general public.
- New theories of the era to justify unprecedented price increases.
- Decline in lending standards.
From the early to mid-2000s, many observers believed that a “global” housing bubble was developing, as many individual countries around the world experienced protracted property booms that began to show worrying symptoms such as bubbles. Some observers believed that this global housing bubble was bound to be followed by a global housing price collapse (GHPC).
In trying to determine why many isolated national housing price drops have not yet escalated into global house price drops, it is necessary to compare economic conditions in each country. Whether the value of real estate declines or continues to rise will depend on a delicate balance between the many economic and social factors at play in each country. These factors include population growth, new home availability, discretionary income levels, GDP, unemployment rates, interest rates, credit availability, rental income, vacancy rates, marginal tax rates, and home ownership rates.