by Nutan Brown
on Wednesday, June 2nd, 2021 at 10:37am.
A housing bubble occurs when there is a rapid increase in home prices at an unstable rate.
Under healthy conditions, homeowners continue to earn equity over time, sellers can make a profit on resale, and buyers can still afford to get into the market. But in a housing bubble, a sudden price decrease can result in many owners holding negative equity (a mortgage debt higher than the value of the property).
Homebuyers who purchased a home during a housing bubble likely paid more than the property is worth. Over time, the property will rebound back to its true value and return to positive growth. But those who purchased a home and are now forced to sell will come up short on resale.
For example, someone who purchased at peak market prices, but due to circumstances such as a job loss or the inability to carry the costs for any reason, now has no choice but to sell in a down market. The seller still owes money to their mortgage lender on a home that they no longer own.
The effect of COVID-19 on the real estate market has resulted in some speculation about a housing bubble. At first, homebuyers were waiting on the sidelines to see what would happen. Then once consumer confidence returned, prices shot up and continued to climb.
But just because prices have rapidly increased does not mean we are in a housing bubble. The unique circumstances over the last year created pent-up demand which is now being released on to the market. This results in organic growth which should eventually stabilize.
Most of the time, a housing bubble can only be recognized in hindsight, after the crash has occurred. Since we don't know what will happen in the future, we can't say for sure. One thing we can say is that the best defence against the bubble is wise investing.
If you are thinking of entering the housing market, contact me for some professional advice.