How to spot an impending real estate bubble
Telltale signs to watch out for
A real estate bubble is a global economic crisis that happens when the rising prices of a property market suddenly fall and cause the economy of a nation to slump for an extended period of time. One example of this occurrence is USA’s recession in 2008 that resulted from a real estate bubble forming and subsequently popping in the country.
The US government lowered restrictions for home loan requirements in order to boost growth in the real estate sector. However, most of the borrowers had bad credit or were individuals who speculated that property prices would continue to rise and bought a home for investment purposes and not for residential use.
At the same time, developers launched a massive amount of supply into the market as they saw growing demand, but did not realise it was artificial demand. The turning point was when the bad-credit borrowers could no longer afford to pay off their loans. Defaults happened all over the country and showed investors that the rising price of properties was based on artificial demands. This forced investors to stop buying property and prices dropped rapidly. Eventually financial institutions ran into huge debts which caused the American economy to stumble.
More: Remote risk of property bubble in Thailand
There are no ways to completely prevent a real estate bubble, but there are some indications when one may be forming and there are ways to help stop it from inflating. One way to make sure that the property market in a country isn’t at risk for a bubble is to look at the restrictions for home loans. If the qualifications are tightened, there is less of a chance of a bubble building.
However, if there is a government scheme that might loosen home loan restrictions in place, there is reason to be cautious about the market. The second thing to look out for is property prices and salary. It’s important that home prices aren’t rising far beyond the average salary. “If the home prices rise faster than salaries, it would be a sign of bubble,” says David Reiss, professor of law at Brooklyn Law School in Brooklyn, NY.
Meanwhile, SCB’s Economic Intelligence Center (EIC) reveals that there are still no concerns about a bubble in Thailand’s real estate market for this year. “Most developers concern about affordability of the consumers, and home loan qualifications are still restricted,” says the EIC.
This article originally appeared on DDProperty.com on 3 February 2017
Read next: The ultimate guide to SE Asian real estate in 2016
Source: Property Report
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