If you’ve been paying attention to real estate for the last little while, you’re probably well aware of the fact that some industry experts believe we are in the middle of what is known as a real estate bubble. Although it remains to be seen whether this prediction will come true, it’s important to understand exactly what a real estate bubble is and how to protect yourself against the inherent risks that come when this bubble bursts.
What exactly is a real estate bubble?
Perhaps you’ve heard the term ‘real estate bubble’ but are not sure exactly what it means. Basically, it’s when there is an above average increase in housing prices that is rather quickly followed by a decrease in prices – in which purchase prices return to previous levels or lower.
What are the risks?
There are quite a few risks that come when a real estate bubble pops. Not only does it mean lower asset levels/personal wealth, it can also cause a ripple effect in the economy that may result in job losses and other negative effects.
For those that purchased when housing prices were at their peak, a housing bubble can be especially problematic as your home is no longer worth the amount for which it was purchased, leaving the owner with a large mortgage and, in some cases, negative equity – which is when the market value of a property falls below the amount that is still owing.
What are the signs?
There are a few general signs that a housing bubble is forming. Generally, when individuals start to take on higher levels of debt, lending standards becoming more lax, low interest rates are in play, housing prices start to increase dramatically and there is a lot of real estate investment. When this is all occurring, a real estate bubble could be forming. A decrease in housing prices and less real estate activity suggests that that bubble could be ready to pop. These conditions, for example, are all evident in the Toronto real estate market, which many experts suggest is the top city in the world currently at real estate bubble risk.
How can I protect myself?
There are signs that government agencies are working to help mitigate the risk of a real estate bubble. New mortgage regulations, for example, that require individuals to pass a more stringent mortgage stress test are designed to help ensure that individuals can really afford their homes as interest rates rise, and help diffuse some of the risks.
It is also possible to take a few steps to protect yourself from experiencing the negative effects of a burst real estate bubble. Firstly, before applying for mortgage approval, it’s important to figure out how much you can comfortably afford to pay for your home without experiencing financial stress. Putting as much down as possible is also a good way to protect you and your family against any fluctuations in the market. Also, trust your instincts. If a house just seems too pricey for what you are getting, that’s a good sign that you may want to look at something more affordable.
Finally, finding the best mortgage solution for you that is tailored to your individual needs is another way to help insulate yourself. As an experienced mortgage broker in Barrie, I can work with you to find the right mortgage solution. To learn more about how I can help you find the best personal finance and mortgage solutions available, contact me via email or phone at 705-315-0516 to set up an appointment. I’m here to help you get those keys to your home!