What happens after a real estate boom?

The housing market is the biggest investment in most people’s lives. When you buy a house, you buy an idea of ​​yourself – a place to live that meets your needs, a stable base to build a life around, and a symbol of your status.

But there are times when the housing market spirals out of control. It can affect all kinds of people and the cycle can be difficult. It can also wreak havoc on the economy, but what comes next?

After the pandemic property boom that happened last year, Australia is now at the end of the boom. Home values ​​in capital cities like Sydney and Melbourne are falling, while parts of the country are positioned for future growth.

The good news about the housing market is that there will always be people who want to buy a property. The demand will always be there, so if you’re thinking of buying your first home or raising the price, it’s never too late, just plan ahead!

Understanding a real estate boom

A housing boom is a period of rapidly rising house prices, which is then followed by a period of declining sales and construction. It occurs when real estate prices rise rapidly due to an increase in the supply of affordable housing.

There is a strong demand for housing and developers are motivated to build more houses. This increases the supply of housing options, which lowers house prices and makes it easier for people to buy their own.

A housing boom is caused by a combination of factors, such as:

  • Low interest rates
  • High levels of capital gains
  • Strong economic growth
  • An increase in land supply
  • Increase in population and migration patterns that drive demand
  • An increase in the disposable income of people who own a home

When a real estate boom comes to an end, there is a lot of uncertainty and instability because the market has not yet had time to recover and stabilize. When this happens, several scenarios are possible.

Houses can become more valuable than they were before the boom started, but that’s not always true – if a house is bought during a housing boom, it will likely cost more than if it had been bought in another moment.

What happens after a real estate boom?

Real estate booms are usually followed by real estate bankruptcies. A real estate bust occurs when there is a decrease in demand for housing and the value of properties subsequently declines.

In order to reduce the price of houses, investors sell them quickly, which leads to a drop in demand. As a result, there is less money available for developers to build new homes, which then leads to a reduction in supply.

A housing bust occurs when prices fall rapidly, which is caused by:

  • House prices are rising too quickly – this may be a combination of too much debt and low interest rates. If you took on significant debt to buy your home, it could cause problems when its value drops.
  • A downturn in the economy – it becomes more difficult for people on fixed incomes to afford housing. It can also happen if there is another financial crisis like the one in 2008-2009, caused by real estate bubbles bursting all over Europe and America.
  • High interest rates — if they get too high, people will stop borrowing money because they know they can’t pay their debts even if they want to. Instead, they will sell their homes or move to a cheaper place where property values ​​are not yet that high! In other words, “the market has changed”.

An investor who bought during a crisis will usually be able to get their money back if they want to. Homeowners, meanwhile, may have to sell if they want to leave their home if it’s worth less than they paid for or if they can no longer afford mortgage payments (especially if interest rates have increase).

Who wins and who loses in a real estate bankruptcy?

In a real estate boom, the winners are the builders, developers and owners who can then sell their properties for a profit. The losers are those who bought or built on land that is now worth much less than they paid for it.

A home bankruptcy can also be bad news for investors, retirees and anyone with too much debt.

For investors: If you invest in the wrong property, it may lose value once a bubble bursts. Flippers or renovators who have spent a significant amount of money will find it difficult to sell their property for a profit or even recoup the cost. Owners’ rental income will be hit by rising vacancy rates as demand slows due to high prices. Getting caught in a real estate bust will be hard to recover from.

For retirees: With work pension coverage or an annuity from previous savings or investments, retirement income is usually guaranteed for life, but not always by law. Property values ​​have fallen so much in recent months that seniors may find themselves without enough money after paying their mortgages on time each month, meaning they may need to act now rather than wait until later, but only if they have enough equity. in their remaining homes from previous sale prices before buying another one.

Those who have borrowed money against their home can also lose financially. If someone has more debt than their home is worth today, it may be difficult, if not impossible, to pay it off. It could mean losing everything, including personal property.

Conclusion

Ultimately, no one can predict with certainty what will happen to the housing market. Make a calculated decision when navigating through your options.

Take advantage of the lower prices, but be sure to get a bargain. Cut losses by selling your property, but do it with a clean mind and not because you’re panicking.

If we recall the course of the real estate cycle, the market will stabilize right after its decline. So, as an owner or investor, this is not the end for you.

There are so many opportunities in the housing market, and it’s only a matter of time before you find one that meets your investment goals.