The term housing bubble is a common term used by reporters in a prime-time news broadcast. You must have wondered what a housing bubble is and how it can affect the real estate housing market. Knowing what this term means should not be just out of curiosity but is a need of the hour. Not only will it help you understand the real estate lingo in a better manner but make you informed about the best practices when it comes to buying property or a house.
What is a Housing Bubble?
A housing bubble is a metaphorical phenomenon used to refer to an upsurge of housing prices at an unprecedented rate brought about by an imbalanced demand supply ratio where demand proceeds supply. The housing bubble after being stable for an unforeseeable time period inevitably bursts to cause housing market correction. It is necessary to understand that typically a rise in house prices with a high single digit is presumed normal and supports the health of the real estate housing market.
However, an abnormal surge is indicative of an impending house bubble. In a normal real estate market, home owners continue to earn equity, house sellers are able to get a return on investment whilst a high proportion of buyers continue to have high affordability. These positive trends are usually a result of booming employment rates, interest rates affordable to mortgage seekers and overall, a favorable economy.
Trends in the housing market are heavily dependent on a range of factors that determine the changes across the country and worldwide. Let’s understand how some of these factors may cause the production of a housing bubble.
Factors that cause a housing bubble
Unstable Economy
The COVID 19 caused a massive industrial and economic shutdown. Similarly, operations in the housing market also plummeted leading to an accumulation of savings, as buyers and sellers alike felt the need to stay cautious during those times of uncertainty. Towards the end of the COVID 19 pandemic, a huge proportion of wealth got injected into the real estate housing market which caused a sudden hike in house prices owing to a greater demand and limited supply.
Low Interest Rates
Interest rates that can be afforded by an average individual are considered low. When low interest rates dissolve the competition between a high income and average income consumer, the majority gets to have a supplementary income to invest in real estate which brings about a greater demand and increase in house prices.
Hoardful Buying
With the expectation of earning a hefty profit, investors and spectators may sometimes mass buy properties and cause a reduction in the number of houses left for consumer buyers. Again, an imbalance between demand and supply drives up house prices.
Cheap Mortgages
When banks or lenders offer mortgages at low credit rates and minimum standards, they may also lend a mortgage amount to those with little to no financial credibility.
Lack of Housing Supply
Sometimes, the house demand may exceed supply for a given location and so may cause an uphill battle between buyers especially when it comes to high demand neighborhoods. The low supply hence leads to a hike in housing market prices in that particular location.
Hesitant Sellers
In an unstable economy, most house sellers are reluctant to sell off their properties as they anticipate to receive a good return on investment once the housing market stabilizes. This anxious behavior by sellers diminishes the already strained supply inventory of the housing market and pushes the house prices out of the reach of potential buyers.
Is Canada in a House Bubble?
Residential investment contributes largely to the GDP of a country and has strong influence over other industries like finance and construction. According to economists, an abnormal growth in residential investment that occupies a considerable chunk of the GDP and replaces general economic growth from other sectors, happens to give favorable conditions for the formation of a housing bubble. Though the Canadian housing market appeared to experience a soft landing at the end of the COVID 19 pandemic, economists fear that an exponential growth in the real estate sector shall swallow the economy if preventive measures are not in place. It is reported that Canada’s GDP in 2006 was widely dependent on the real estate housing market compared to the US.
The steep hike in house prices post the COVID 19 pandemic coupled with mass layoffs leading to recession greatly impacted the Canadian economy. Despite these circumstances, expert economists are optimistic that a housing bubble is still unlikely and that house prices will bottom at the end of 2024 and the beginning of 2025 to cause house market correction.
