Professional Blog

Real Estate Predictions and Identifying Asset Bubbles

January 20, 2020

Rise in housing prices can be due to two scenarios:

  1. When the fundamental economy of a given location has gone through a change.
  2. Or, a speculative bubble wherein investors buy at a high price to be able to sell at a higher price later.

Therefore in order to know the market predictions one needs to look into certain factors which are mentioned as below:

Interest Rates:

They have been the common factor in every growth scenario that can be witnessed in the property market. Question remains whether they are a direct cause or not. However, they are definitely one of the main causes. Market booms have perpetuated in low interest rate atmospheres because it leads to excess money supply wherein the buyers are suddenly flushed with excess cash and queing to buy property. All the downfalls in the property market are also created due to sudden and unexpected increase in interest rates. Therefore, an investor should always stay away from any markets where the rise in property prices happens due to dropping of interest rate.

Housing Inventory:

Another important factor to judge whether or not a market is in a bubble state is the housing inventory. It indicates the amount of unsold homes that the developers have in the given market. Normally, it remains stable due to the fact that developers have general idea of number of homes that buyers will purchase at a time and thus create houses that can fulfill the demand without leading to excess supply. However, during bull market there is a sudden shortage in housing inventory while bear market results in increasing housing inventory.

Absorption Rates:

It is the exact opposite of housing inventory which tells the number of homes that have been purchased in the market during a given period. This number can be easily estimated from the number of requests received by the government for transfer of property titles.

Capital Value Wages:

Another factor is to compare annual wages of an average person staying in a given neighborhood with the capital values prevalent there. This gives the number of years that a person needs to work to buy a house in that area. The average wages is usually calculated from the median wages of all the workers in that area.

Rental to Capital Values:

Another way to predict a housing bubble is to compare the rental values to the capital values. During the change in underlying economic status of a given property, changes in rental as well as capital values can also be found simultaneously. However, during a state of bubble, speculators increase the capital values expecting even more capital gain. Therefore, in such markets there is a huge difference between rental and capital values that can be considered to be the sure shot sign of a bubble.

Thus, there are various indicators in the property market that can help the diligent investors to differentiate between the rise in price and an asset bubble.

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