If you intend to be an investor, it is essential that you know how a real estate bubble works. It can greatly disturb the lives of investors and bring serious problems to a country. The real estate bubble happens when real estate prices are higher than they should be, and it can be caused by several factors.
But what exactly is a housing bubble? How did it happen in the United States and what can cause a real estate bubble? Let’s see the answers to these questions below.
What this article covers:
What is a real estate bubble?
When for social or political reasons the price of real estate increases and leaves them overvalued, we call this a real estate bubble. These values are not fair and are far from reflecting what that property is really worth, so the bubble bursts and prices drop considerably over a short period of time.
When this happens, it can take several years for properties to return to their normal price. A country that suffered from the consequences of a real estate bubble was the United States, let’s see how that happened.
What was the US housing bubble?
The real estate bubble occurred in the United States in 2008, and affected several other countries, it is considered one of the worst crises of the century. The factor that caused this real estate bubble was the ease of financing real estate, with properties that had high investment risks and could be financed easily by anyone.
Thus, people who did not have any kind of financial stability began financing real estate. A good part of the people ended up not paying the financing, and the number of defaults was alarming.
This causes a devastating crisis in the United States and other countries. The American government injected more than 700 billion dollars so that it could recover from the crisis. After that, to protect the economy and prevent this from happening, the government made it more difficult to obtain credit.
Brazil has never faced a real estate bubble, despite having already gone through a real estate crisis, the reasons and causes were different from what happened in the US, and the consequences in Brazil were not so serious either.
What causes a housing bubble?
There are several reasons that can cause a real estate bubble. Now let’s see below 3 main factors that can end up causing a real estate bubble.
If credit is too easy to get, it could result in a housing bubble. As we have seen, this happened in the USA and the consequences were disastrous, with a huge number of people not paying their mortgage.
When there is a lot of speculation regarding the real estate market, the price of real estate can end up going up. But these are just speculations, and if they don’t materialize, property prices plummet, resulting in a housing bubble.
If property prices are highly inflated and not balanced against the market, there is also a risk of a housing bubble.
What are the consequences of a real estate bubble?
A real estate bubble can have negative consequences for a country. In the USA, for example, thousands of people lost their jobs and were homeless, due to the strong economic impact that the country suffered with the real estate boom.
How to recover from a housing bubble?
It is not easy for a country to recover from a real estate bubble, as it takes time and, of course, a lot of money. In order to recover from the real estate bubble that it suffered in 2008, the USA invested more than 700 billion dollars, and even so, they were unable to get rid of the consequences.
Therefore, it is ideal for investors to be aware of everything mentioned above in order to avoid a real estate bubble, as recovering from one is a difficult task.