A housing bubble is when housing prices increase at an unsustainable rate. Any realtor can tell you that it can be caused by several factors, such as low-interest rates, speculative buying, and limited supply of properties relative to population growth. When the bubble eventually bursts, prices come crashing down, which can devastate the economy.
Signs a Housing Bubble is About to Burst
There are a few signs that can indicate that a housing bubble is about to burst.
Increasing Prices
One of the most obvious signs is when prices start to increase at an unsustainable rate—often caused by speculation, as investors try to cash in on rising prices. The problem is that prices can only go up so high before they eventually come crashing down.
Low-Interest Rates
Another sign of a housing bubble is when interest rates are artificially low. It encourages more people to buy homes, which drives prices up even further. Eventually, the bubble will burst, and prices will come crashing down.
Limited Supply
If there is a limited supply of properties relative to population growth, this can also cause a housing bubble. When demand is high while supply is low, prices will inevitably increase.
The Effects of a Housing Bubble Burst
When a housing bubble bursts, it can ruin the economy.
Economic Downturn
One of the most significant effects is an economic downturn. It is because housing prices play a big role in the economy. When prices suddenly drop, it can cause a ripple effect that leads to decreased spending and investment. The result is a slowdown in economic growth. For the economy to recover, it often takes years.
Job Losses
Another effect of a housing bubble burst is job losses. The construction industry is particularly vulnerable because it is directly linked to housing prices. When the bubble bursts, there is a decrease in demand for new homes, which leads to a decline in construction activity. Which often results in job losses.
Bankruptcies
With the decrease in housing prices and the increase in foreclosures, many people are forced into bankruptcy. It can have a long-term effect on their financial stability and ability to get credit in the future.
Social Unrest
The effects of a housing bubble burst can also lead to social unrest. If people lose their homes or their jobs, they may become desperate. It can lead to crime and protests. In extreme cases, it can even lead to rioting and civil unrest.
Protecting Yourself from a Housing Bubble Burst
If you’re worried about a housing bubble bursting, you can do a few things to protect yourself.
Diversify Your Investments
One of the best ways to protect yourself is to diversify your investments. Consider different asset classes, such as stocks and bonds. If one asset class takes a hit, you won’t lose everything.
Don’t Lever Up
Not levering up reduces the risk of losing your home if prices drop. It means not taking out a mortgage that’s more than 80% of the value of your home. The problem with levelling up is that you’re essentially betting prices will continue to increase. If they don’t, you could find yourself in serious financial trouble.
Be Cautious of Hot Markets
Be cautious of hot markets if you’re considering buying a home. Desirable markets are often the first to experience a bubble. If you’re not careful, you could overpay for your home and lose money when the bubble bursts. Remember, buying a house you can afford is always better than stretching your finances to the limit.
Have an Emergency Fund
An emergency fund is always a good idea, but it’s especially important if you’re worried about a housing bubble burst. If you lose your job or home, you’ll have some financial cushion to fall back on.
With the help of a realtor, you should be able to understand the market and make a decision that is best for you. A housing bubble can have devastating effects on the economy. If you’re worried about a bubble bursting, you can do a few things to protect yourself, such as diversifying your investments and having an emergency fund. When buying a home, be cautious and engage a realtor to help you understand the market.