What will happen when the real estate bubble bursts?

Question

Here in England the cheapest hosuing costs about five times average annual salary. People are buying ridiculously expensive houses and total amateurs are becoming property developers. I can't see how it can carry on much longer - I thought there would be a crash years ago. So what will happen when it eventually turns sour?

Answer 1

Your equity be down the tubes and you can buy the house next door for half of what you paid for yours.

Answer 2

If property crashes in value due to the irrational actions of investors, the following will happen. People who have invested in property could begin to look at the returns on their investment, if this is low compared with other investments they may begin to sell property; this will further decrease the value of property, making others sell property.

Banks who had lent money, will be wiping off the value of mortgages being paid back, since new mortgages are not being sold as quickly the money supply is contracting (it not complicated, but, rather wordy to explain).

As banks have less money now, loans are more restricted and therefore we are entering a recession

How long this lasts depends upon 1. How much property prices have fallen and 2. what are the other fundamentals like, etc. bonds etc, as property falls, interest rates should have fallen and it should be a god time to invest in shares, so, there may not be such a bad recession after all (this is very wishful thinking).

People could either wait it out, or emigrate (maybe leaving their losses in the UK??) or decide when things look like they have stopped turning sour and buy a house (the recovery).

A colapse would be accompanied by a lowering of the interest rate as no-one would be buying anything and therefore the government, to stimulate the economy would have to lower the interest rate...just to clarify what is written above.

I think "idamahn" is getting mixed up a little. The UK is a island, but there cannot be economic growth? The long and the short is idamahn is a little lost. Per-capita growth is what affects standard of living, not growth per se. The United Kingdom is an island but growth is not restricted by size, I think Mr idamahn is from the USA and thinks big is beautiful, does he know that Japan (an island) outstripped US (and everywhere else's) growth for years?? There are only a few variables that affect growth 1. The savings rate 2. Population growth (negative) and three productivity growth (doing things better and new inventions), lucky for the UK, the last one is something the UK does very well....

Answer 3

I got caught last time, in 1990. It's not nice and my life has never really recovered.

When the housing bubble bursts, as it will, people who have just bought will have their lives ruined. The collapse is usually accompanied by increasing interest rates which people who have large mortgages will be unable to pay. In addition, purchases associated with house buying, such as furniture and electrical goods and services such as solicitors' time, play a large part in keeping the economy going. So when the bubble bursts there will be a big economic depression and mass unemployment, as a result of which more people will lose their houses.

It is easy to forget the human and social misery that accompanies the collapse of a housing boom. For instance, losing the home is very often accompanied by family breakup.

Whilst housing prices have become ridiculous, I am not sure we are near the bursting point yet. One reason for the boom is the huge number of migrants to the United Kingdom, because things are pretty rotten in many parts of the world and because migrants speak English. The EU, with its consequent migrations, is due to be expanded still further e.g. with the accession of Bulgaria and Romania.

Politicians and policy makers do all they can to stop the housing bubble from bursting while they are in office. The trouble is that the higher the rise in prices, which happens steadily, the greater the fall, which you will find happens much more quickly. This is not good news.

A policy initiative that is now desperately needed is effective taxation on second homes, which would selectively penalise speculative house purchase. As Westminster politicians are subsidised on the grounds that they have houses both in their constituencies and in London this is not likely to happen.

Answer 4

Although you may think it is going to happen, it may not for some time.

The simple fact is, you are on an Island. Not much room for growth. Also when you consider that the UK is one of the BIG BOYS in the G8, people will always want to live there. Throw in population growth and the diminishing number of spaces available to buy and PRESTO a real estate market that continues to grow.

Hypothetically? If the real estate market in the UK crashes it would reverberate throughout the world.

TFTP

Answer 5

A decline in the real estate market would most likely go hand-in-hand with a general slowdown of the economy. people owning real estate (no mortgage debts) would see their wealth decline. Hence they might become more cautious to consume, which in turn would have a negative impact on total aggregate demand of the economy. People, having bought their real estate with debt money might be forced to sell in case they can't pay their mortgage anymore (e.g. when they lose their job, as many do during a downturn of the economy). The selling price would most likely be (much) lower than the price they payed. So we might expect some personal bankruptcies in case the state of the economy develops as described above.

Answer 6

I think the market will stabilize with mostly people at the higher end going bust. As the population gets older, they will more likely want to downsize, so they will likely want to get out of bigger homes into smaller homes ... and resale homes and use whatever equity gained towards their retirement. There will be a point when everybody who wants a home will have what they want and there will be less of a demand for the bigger and better ... so I can see a downward trend in pricing, as well as trouble for those who took on high interest variable mortgages and interest only mortgages ... which are high risk in any market.

If the job economy remains good, there will be possibilities with renting higher end homes. In the event the market is not as good, then I can see more applications for multiplexing larger homes to create several rental units in one property. Because of constraint from rent controls in some jurisdictions, the tendency will be to move towards smaller, more units as opposed to larger units ... and more and more tenants will be saddled with upkeep costs, such as paying utilities.

However, I do believe we learned from bust we had in the 1980's when almost nobody could afford a home. Government policy makers are making adjustments on mortgage insurance requirements and mortgagees are now offering amortization over longer periods of time in the event the "bust" hits right in the middle of a recession as such. At this time, as I see the market turning, people should be advised against taking home equity loans and using some other form of security instead, such as bonds and GICs which will ultimately attract greater investment as interest/borrowing rates increase.

Answer 7

1. There will not be as many participants in the market to buy homes which will lead to a drop in prices.
2. Homeowners who have sat and watched their houses appreciate will notice we are at the high point in the market and want to sell.
3. The increase of sellers, and decrease of buyers will create a discrepency. In the stock market called a bid/ask spread, meaning the difference between someone is willing to pay for the security and what someone is willing to take.
4. The decrease in demand and increase of supply will cause prices to drop. (simple laws of economics)
5. The dropping prices may cause panic among the sellers who want to get out before prices drop more.
6. Buyers notice the dropping prices and would rather wait and watch prices drop before buying. This way they will not end up buying and immediately have negative equity, meaning that they could not sell the house for what they just paid for it.
7. Prices will fall to a level that buyers are willing to pay, and sellers are willing to accept.

Then only problem in the Northern Virginia market now, is that homeowners have seen the tremendous growth in prices over the last few years, and they expect that it will continue to grow at rates of 20%-30% per year, which is not economically sustainable. So sellers have unreasonable expectations of what their homes are actually worth.

So, will the market decline or keep increasing???? time will tell.

Answer 8

It already has, right here in Arizona. Phoenix became into the main well liked industry in the rustic (fifty 5% in a million 365 days). Now it is dipping circulate into opposite, via fact the traders get out - there are inner maximum investers that have 10-15 unrented properties & they're having to pay the non-public loan :-) however the different underlying pressures nevertheless exist right here - substantial speedy improve (2d in straightforward terms to Vegas) and so the charges wll %. back up in a 365 days or so.

Answer 9

The "INVERSE RELATIONSHIP" between Real-Estate and Interest Rates will bring it all to an equilibrium. Additionally, when Interest Rates are low, the market is said to be "Loose Money"; When Interest Rates are high, then the market is said to be "Tight Money".

Example ... say today you want to buy a house for 200.000,00 Euro's. Real-Estate prices are high, so interest rates are low and we're in "Loose Money" times. This means that you typically can buy that house with a low down payment (typically 1-5% market value) ... so you would need a down payment of 10.000,00 (5%) Euro's, and over the life of the mortgage, you will pay lower interest rates (typically 6-8% depending on your credit worthiness).

Now, when the "Bubble Busts" on the Real-Estate market, prices will drop and interest rates will rise. We'll say that the value of that same house drops from 200.000,00 Euro's to 140.000,00 Euro's. (Yikes? ... Not really ... ). Since interest rates are high, we're in "Tight Money" and you'll be required to have a bigger down payment (20%). So now, to buy the house you'll need to have 28.000,00 Euro's and you'll be paying a higher interest rate for the term of the mortgage.

In the end, this inverse relationship will equalize the prices and the person who buys expensive real-estate with low interest rates really pays about the same as the person who buys the cheap real-estate with high interest rates.

Answer 10

The stock market should start to boom because people will be taking their money out f houses and into the stock market. People trying to flip houses right now are screwed. You will see a lot of people losing their houses in the next 3 years. It will be a good time to buy for us investors. Gold and Silver might be a good investment as the real estate market cools for right now.

Answer 11

1) There won't be a massive sell-off, since houses still hold residual value (ie, you can live in them, you can rent them out and derive income, etc.)

2) It'll be a whimper, rather than a bang. You'll see demand for mortgages fall as a first signal, and as the rates fall (and housing prices start to fall) you'll see more people buy in, thus slowing the drop. It'll be a long, slow decline.

3) Interest rates and housing prices will eventually be lower than they are now, and the housing industry will remain stagnant, but not for terribly long.

4) You'll see conversions of large houses to multi-family dwellings a la condos, townhomes and apartments.

5) You'll see a general slowdown in other sectors, combined with a continued rise in debt, as homeowners attempt to pay down their loans.