Table of Content
- What’s real estate bubble?
- How does it form?
- Why government can’t stop bubble from forming?
- How does real estate bubble burst?
- When does it burst?
- Why does it burst?
- What are the consequences of Real Estate Bubble?
- Who gets affected in housing price collapse?
- How to prevent bubble from happening?
- The Biggest Reason for Bubble to Burst
- Why Can’t Bubble be Stopped from Forming?
- How to Protect Yourself?
- When Will it Burst This Time?
- Signs of Bubble
2How Does a Real Estate Bubble Form?
When people see condo price rising, they see the opportunity to invest or buy-to-live, fearing that the price in the future will be too expensive to buy.
But since, most of the population do not have the money to buy a condo or a house, coupled by misleading guidance from gurus and online information, to use bank’s ‘free’ money. People finance their buying with low downpayment (high LTV ratio mortgage.) and high debt. You will understand later in my article why debt leads to bubble.
As more and more people buy condos, the demand increases. The price increase, and therefore, the loan amount increases, so people are in higher debt. This causes an upward spiral due to high demand, developers need to buy more land to build more condos, the land price increases and, hence, developers need to sell condos at an even higher price. Buyers see the continuous rise in property price, they rush to buy more condos which pushes the price even higher and they need to take an even higher loan. With high loan, the interest they pay becomes even higher and puts them in more debt.
The over-pricing of property financed by debt is a bubble being formed. Because people are not really using money, they are using credit or debt, They overspent heavily on something they can’t afford without debt. And these debt are subjected to interest rates which grows people’s debt.
The over-pricing of property financed by debt is a bubble being formed
Saying that a bubble forms because debt/credit supply fuels the price of property to grow. Condo demand causing condo price to increase is an illusion because condo demand happens only when there is credit supply.
Therefore, condo demand growth depends on credit supply growth. Without credit supply, because can’t buy so they rent and live a sustainable life.
Condo demand growth depends on credit supply growth
Why credit inflate bubble? Read Credit and Bubble