Why Housing Market Bubbles Pop

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housing bubbles

The UK housing market is often a good indicator of the strength of the economy, but sometimes house prices seem to take on a life of their own. This does mean that housing market bubbles can pop eventually, and if you are thinking about investing in a property, it is important to understand why this might happen and gauge when it is coming.

The housing market seems to be on fire at the moment, but how long will it be until this burns dramatically to the ground? Indeed, is this even a likely outcome or are we more likely to see a steady descent or stagnation?

Here, we take a look at what the housing market bubble means, the factors that might make it pop and whether it looks like these are on the horizon or not.

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What is a housing market bubble?

Whilst the housing market has its ups and downs, it is usually assumed that prices will not change too dramatically in either direction. Even so, housing markets can see somewhat unexpected rapid rises before finally falling back down to their typical levels. These periods tend to last for periods of months or even years and tend to be caused by a combination of high demand and low supply.

This starts to inflate prices beyond where they would normally be. This is often a result of rising economic prosperity and low-interest rates as well as mortgages and credit options that are easy to access.

Once demand starts to rise, speculators enter the market looking for investment properties in anticipation of prices rising further and a profit being made. This only serves to increase demand even further and prices naturally begin to rise as properties are snapped up and fewer are available to those who want them. Unlike other goods and services, it can take time to respond to this demand, as new houses do not simply appear overnight, and so this can lead to prolonged periods of demand that is not being met.

This demand is often brought about by increased prosperity, as people find more money in their pockets and look to either buy their first home or upgrade what they have. It can often be a result in a rise in population as well, and the market becomes flooded by people looking for houses.

We have experienced very low-interest rates for a long time, and this helps to make homes more affordable, therefore encouraging people to finally make the move. This is coupled with mortgage products becoming more competitive and underwriting standards being lower, making it easier for people to get be accepted for credit. There has also been a recent stamp duty holiday, which has meant that people have tried to cram their house move into this window all at once when many would have taken more time to do this.

What bursts the bubble?

This property bubble grows and grows over time, but it is called a bubble because eventually, it will burst. This is because this level of growth is simply not sustainable over a long period of time. This bursting of the bubble is often brought about when prices no longer actually reflect the true value of properties.

The supply of housing will continue to increase as new houses are built and more people are encouraged to put the houses on the market, but eventually the demand for those houses decreases, and a sharp fall in prices ensues.

This might be triggered by an increase in interest rates that will put homeownership out of reach for some, and even make the home they live in unaffordable. If the economy itself takes a general downturn, it will also be felt in the housing market. This means that people have less spare cash or may lose jobs and are no longer looking to buy houses. The end of the stamp duty holiday will also reduce the number of people who are looking to buy properties.

When demand is exhausted, supply and demand fall into line again and the increase of prices will begin to slow. This can lead to investors losing their profit margins and homeowners finding that their property is no longer something they can afford, leading to downsizing or repossession.

When will the bubble burst?

It can be hard to predict when the bubble will burst, and many estimate that it will not be long given that houses have risen at their fastest pace in the last few months than they have in the previous five years. The average selling price has now reached record highs of more than £258,000.

Whilst it seems that demand may steady at the end of the stamp duty holiday, but it may not be enough to send things into a complete spiral. The UK is well-known for having a population that sets a lot of stalls on buying property and being a homeowner has far more emphasis than it does on the continent. That means that there is a near-constant demand for property.

It is fair to say that the country has been through a long period of uncertainty thanks to changes in Prime Ministers, the Brexit referendum and the eventual departure from the European Union and of course, Covid. This usually causes people to move towards safe-haven assets as it is seen as a more stable investment. That means that no matter what the world has in store for us next, property prices might start to slacken off a little, but they are unlikely to burst in the way that we have seen in the past.

The real estate sector and planning system have a lot of changes coming to it which are likely to be positive ones that could end up keeping the bubble afloat for much longer than first thought. That means that property prices are likely to stay high at least for a while yet and the market will still see some buoyancy.

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This article was written by Mark Burns. Mark is the managing director of property investment company Pure Investor, who specialise in UK property investment and Buy-to-Let Property Investment.

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Millie is a perfectionist with a passion for property and writing articles. You’ll find her researching the latest housing trends and the newest up and coming areas worth investing in. Read more about Millie here.

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About Millie Archer 142 Articles
Millie is a perfectionist with a passion for property and writing articles. You'll find her researching the latest housing trends and the newest up and coming areas worth investing in. Read more about Millie here.

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