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The Booming Phase Of Real Estate!
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A real estate boom, property boom or housing boom all refer to the same thing. It is a type of economic bubble which has periodic occurrence in local or global real estate markets. In this phase there is a rapid increase in the valuation of property such as housing until it reaches an unsustainable level and then gradually it declines. The fundamental law of 'demand and supply' in economics states that if the demand is greater than supply, it leads to the rise in prices of the commodity. The current scenario of the real estate throughout the globe is a true portrayal of this basic principle of economics.
1. Too much home ownership. Homeownership has increased due to easy credit, over-emphasis on ownership, and herd mentality encouraged by the media encouraging investment in residential real estate. Too many people with little money can now also own homes.
2. Buying for speculation rather than shelter. A study says that many homebuyers identified their purchase as investment or vacation properties. Real estate inherently has a speculative component.
3. Low interest rates. A lot of banks provide low interest housing loans.
4. Residential real estate is a safe harbour. Share market keeps on fluctuating. People frequently lose money in shares. So whatever money is left, they put it in residential real estate, figuring that it would be a safe and secure investment. This drives up the price of housing.
5. Bad lending practices. This one thing is the major cause for the bubble and its bursting. This in turn leads to the cascading effect of unemployment which in turn leads to defaults.
Real estate boom is more critical than the stock market bubbles. A recent experimental study shows that, real estate markets have longer boom and bust periods, as compared to financial markets. The housing market is not a market to do "flips" for the "momentum" investor like they do in the stock market. One should be ready for a long term "buy and hold" position in the real estate.
It is a pre-dominating economic perspective that economic booms result in a temporary boost in wealth and its redistribution. When there is a price rise, we can observe a positive wealth effect in which property owners feel richer and thus spend more, and when the prices fall, there is a negative wealth effect in which property owners feel poorer and thus spend less.
Now what is the possible solution to avoid such unexpected bubbles? States should abrogate those laws and programs that made housing expensive. If there is no bubble, there would be no burst and no recession.
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