How to Identify a Housing Bubble in the Economy
The world is cowering in fear as we speak due to the possibility of an on-coming housing bubble! A number of countries, including New Zealand, Australia, and England have tightened their lending conditions as a precaution. The United States is strongly advising anyone who is attempting to mortgage a house to make sure they have back up funding just in case a housing bubble occurs during their mortgage. The question here is can we determine when a housing bubble is coming beforehand, or if it can only be noticed after its arrival? While it is true that we cannot be certain of the exact time the bubble will occur, there are a few factors that often occur just before one.
Rise in Property Values
There is usually a sharp spike in property value just before a housing bubble. This is usually one of the first factors you will notice before such a bubble occurs. Property values over the world will be expected to double in less than a decade, or some other such occurrence. The rises will differ depending on what country it is and the situation therein. For example, currently Australia has one of the highest property value spikes leaving their current housing cost far higher than most countries. Some experts have even concluded that the living costs would be unsustainable if a bubble should occur there.
Credit growth is another factor that can lead up to a housing bubble. The more people borrow money and take mortgages the more the real estate economy is inflated. When this occurs, people are often forced to borrow more in order to keep up which then increases their interest. (This is why the United States suggested that people mortgage a place that is below their price range in order to have back up funds) As their interest increases, more and more people are unable to keep up with their payments. Thanks to the lax rules for mortgages around the world, this is already occurring today as more and more people are going into debt because of mortgages they are unable to pay for. The more people go into debt, the more inflated the real estate prices get. The cycle will just go on and on until the housing bubble is already upon us!
Lax Lending Standards
This is the factor that links the other two. People are allowed to borrow large amounts with interest and lax restrictive standards. When these people borrow and are unable to pay it causes a rise in property prices. After such a rise in property prices, people are forced to borrow even more in order to compensate; but even though they borrow more they still end up with both a higher interest and the inability to pay it off! It goes all the way back through to inflation of the real estate. This is the essence of a housing bubble, when these three factors keep bumping each other up and up until housing costs are so high that no one can afford to buy them! If you are seeing these three factors in your country, prepare yourself now! A housing bubble may be heading your way!