5 Tips to Spot a Real Estate Bubble
A real estate bubble is the abnormal increase in property price due to artificially high demand. As there is no real demand, the bubble soon bursts and we see huge property price crash. Whenever a bubble bursts, people lose their life savings. Just read the 5 tips to spot a real estate bubble to save your life saving.
Economic health is a good indicator of real estate bubble as it determines the purchasing power of buyers. We must know the simple rule that rising economy is high property price and falling economy is low property price. When economy is falling but prices are still high, stay away from reality sector as its in bubble phase and will collapse soon.
Fast property price rise
If we observe the last property bubble, prices doubled in just few years’ time. In a healthy property market, property price rise is gradual. But in a bubble market, property price rise is fast due to huge influx of money. So when you see the sharp price rise in very short time period, it’s the sure sign of a real estate bubble.
House price to income ratio
The world affordable income to house price ratio is 1:5. According to the experts, when house price to income ratio is 1:15, it’s the sign of a property bubble. At this ratio houses are highly unaffordable and people stop buying. When there are no buyers, property prices just start falling. So high house price to income ratio is another indicator of a real estate bubble.
Low interest rates
Interest rate has great impact on house price. When interest rate is high, real estate prices fall. But when interest rate is low, property prices increase. It’s because low interest rate makes the property loan payment very easy. Historic low interest rate is another sign of a bubble market, as with the rise of interest rates property prices will crash.
Investors cannot find property at low price
Many people buy houses for buy to let investment. In normal market, yearly rent should be at least 4-5% of property price. But sometimes houses are expensive to buy but rent ratio is low. In this case it’s not worth to buy a property as it will take more time to recover the investment money. This is another indication of a real estate bubble.