A real estate bubble occurs when property prices rise rapidly and disproportionately, far from their real values, which can trigger serious economic and social crises. This phenomenon is fueled by speculation and high demand, but when the bubble “bursts,” prices fall dramatically, bringing devastating consequences for the sector.
How to identify a real estate bubble?
To recognize the emergence of a real estate bubble, it is necessary to closely observe certain economic indicators. Among the main signs are:
- Disproportionate growth in real estate prices: when prices rise faster than inflation;
- Excessive easy credit: banks offer loans with little regulation, increasing the number of buyers;
- High speculation: investors buy real estate in the expectation of appreciation, without considering the feasibility of use or rental;
- Stagnation in real demand: many units remain vacant, even with the growth in the construction of new properties.
When does the bubble arise?
The real estate bubble usually arises in economic cycles of euphoria and excess liquidity. During periods of economic growth, high demand for real estate, combined with easy credit, causes uncontrolled price appreciation. This cycle is exacerbated by speculation, where investors constantly bet on appreciation.
The main causes of this phenomenon include excessive credit and low interest rates, high speculation in the real estate sector, excessive construction of real estate, and lack of regulation in financial markets.
How to avoid a real estate bubble?
To avoid the formation of a real estate bubble, it is essential to balance economic growth with adequate regulation of the real estate sector and credit supervision.
- Real estate credit regulation: require rigorous credit analysis by banks;
- Land use and urban planning policies: expand the supply of land and regulate land use, liberalizing new areas for construction in a controlled manner. It is also important to encourage the development of smaller cities to reduce pressure on large urban centers;
- Control over speculation: real estate speculation should be controlled through taxation on vacant properties, taxes on excessive capital gains, and regulation of real estate purchases by foreign investors in order to prevent local price inflation;
- Strict supervision of financial institutions: it is essential to regularly audit banks and ensure that the banking sector is not overly leveraged in mortgages, as well as requiring mandatory reserves for real estate loans;
- Flexibility in economic policies: the government can raise interest rates during periods of high speculation to reduce available credit and control demand. In times of economic slowdown, incentive policies can balance supply and demand without creating a new bubble cycle.
Source: https://www.papoimobiliario.com