Real Estate Bubble – Emergence & Consequences

Real Estate Bubble – Here you can get a brief overview of what a real estate bubble is, how it occurs and what the consequences are if it bursts. Real estate bubble – briefly & concisely explained:

What is a real estate bubble?

Many who hear the word real estate bubble first wonder what the term is all about. A real estate bubble is a form of speculative bubble. The term real estate bubble states that real estate is being sold at overpriced prices and is generally overvalued. The higher these prices get, the bigger the real estate bubble gets until it finally bursts after reaching its peak. Once it bursts, prices fall abruptly.

How does a housing bubble happen?

The prerequisite for a real estate bubble is a high demand for real estate through which the real estate price is influenced. Real estate bubbles can arise for a variety of reasons. A common reason is a low interest rate policy in combination with rising real estate prices. If the conditions for granting a loan are relaxed, more people are able to take out a loan, thus increasing the demand for real estate and thus the prices.

Another reason for the emergence of a real estate bubble is government incentive programs. An example would be the concession of a tax.

What causes a real estate bubble to burst?

A real estate bubble bursts precisely when the previously enormously high demand suddenly subsides. But what causes demand to suddenly drop? There are two different possibilities. Either because the buyers hope for falling prices and for this reason postpone the purchase of a property in the future or when more properties are sold, because the owners are afraid that the property prices will fall and they want to achieve the highest possible price for their property. Due to such a situation, there are more offers, the demand decreases and therefore the prices as well.

Housing bubble or still buying now? – Video

Real estate bubble bursts – the consequences

Real estate bubbles cause many dangers. The last real estate bubble in Germany contributed to the financial crisis in 2007. The consequences of a burst real estate bubble are long-lasting. While the real estate bubble still exists, the social consequences are in the foreground. Especially in the big cities, housing is almost unaffordable for the majority of people. As soon as the bubble bursts, however, the economic consequences come to the fore.

Real estate owners who want to sell their property or who are still facing follow-up financing are also feeling the negative consequences of the real estate bubble. By selling the property, the owners can not only no longer make a profit, but they usually even have to expect a large loss. If the property was bought at a time when the bubble was particularly large, the loss is enormous. But not only such circumstances are conceivable. If a real estate bubble bursts and at the same time a follow-up financing for the property is pending, owners often have to reckon with an increased interest rate level. The monthly repayment to be paid can increase enormously due to this circumstance. If you run into financial problems in this situation, you run the risk of selling the property at a low price and having to absorb a loss.

You can find more infographics at Statista

Real estate bubble in Germany

The last real estate bubble in Germany occurred at the end of the 90s. For seven years, real estate prices kept rising and demand was huge. How is the real estate market developing? Here you will find more answers: