Property bubble: definition and explanation

A property bubble is a term that is often used in connection with the property market. It describes a phase in which property prices rise excessively, often due to speculation and excessive buying interest. These price rises are not justified by fundamental economic factors such as income or demand. As a rule, a property bubble leads to a drastic fall in prices when the market corrects itself.

Causes of a property bubble

There are several factors that can lead to the creation of a property bubble. Here are some of the most common:

• Excess supply: When flats and houses are built in large quantities, this can lead to an oversupply that depresses prices.
• Low interest rates: Favourable loans and mortgages facilitate financing, which leads to an increase in purchasing power and ultimately pushes up prices.
• Speculation: Investors betting on rising values can artificially push up prices, which reinforces the bubble.

Consequences of a property bubble

The consequences of a property bubble are serious. If the bubble bursts, the following consequences can occur:

• Loss of value: property quickly loses value, resulting in financial losses for owners and investors.
• Economic instability: A sudden drop in prices can destabilise the entire financial system if many outstanding mortgages exceed the market value of the property.
• Unemployment: Construction companies and related industries can suffer, leading to an increase in unemployment.

Examples of property bubbles

The US property market from 2006 to 2008 is one of the best known examples of a property bubble. Excessive speculation and the supply of risky mortgages led to a price explosion, followed by a dramatic market collapse that contributed to the 2008 global financial crisis.

Summary

In summary, a property bubble is a critical phase in the property market characterised by excessive price developments and speculation. Careful market observation and regulation are necessary to prevent future bubbles.

Illustrative example on the topic: property bubble

An illustrative example of a property bubble can be found in the history of the Dubai property market. At the beginning of the 2010s, Dubai experienced a property boom that was accompanied by strong demand, low interest rates and a flourishing economy. Investors flocked to the city in the hope of high returns. Property prices soared and luxurious new-build projects were completed at a record-breaking pace.

However, as in many other markets, the boom followed the boom years and prices began to stagnate. As a result, sales figures fell and many investors were faced with the dilemma that their property was worth less than the purchase price. This led to a chain reaction of sales that resulted in drastic price falls and jeopardised the stability of the market.

The lessons learnt from the Dubai-specific property bubble are a reminder to be cautious about excessive speculation and show the importance of balanced market development.

If you would like to find out more about current trends in the property market, as well as buying and selling strategies, please also read our articles on [Buyers‘ Market](/lexikon/kaeufermarkt/) and [Sellers‘ Market](/lexikon/verkaeufermarkt/).