Introduction:

Imagine you have a collection of bouncy balls. The balls represent houses, and their price is how high they bounce. Normally, the price (bounce height) goes up a little each year. But what if the balls started bouncing WAY higher, much faster than usual?

That's kind of like a housing market bubble. Prices shoot up quickly due to changes in people’s behaviour, and typically followed by sudden decline in value hence leading to a bubble burst later.

Soaring housing prices across the globe have fueled concerns about another housing market bubble. Memories of the 2008 crisis linger, prompting the question: are we on the verge of another housing market crash?

Signs of a Potential Bubble:

• Rapid Price Appreciation: According to a report by the National Association of Realtors (NAR) in the US, the median existing home sales price in May 2024 reached a record high of $416,900, a 17.2% year-over-year increase. House prices in Canada have also grown by over 20% in the past year, and Australia has seen jumps of around 18%. This rapid growth across the globe suggests a potential housing bubble. This kind of rapid growth can be a warning sign of a bubble.

• Low Interest Rates: Historically low interest rates have made mortgages more affordable, contributing to the surge in demand and potentially inflating prices.
  Even though interest rates are currently quite high, there's no sign of a slowdown in housing prices. This disconnect between rising borrowing costs and stable or even increasing home values is unusual and could be a sign of an overheated market.

• Speculative Activity: An increase in investors buying houses to flip for profit can further inflate prices and create an unstable market.

However, the situation is not a mirror image of 2008. Here's why:

• Tighter Lending Standards: Following the 2008 crisis, lending standards have become stricter. This makes it harder for unqualified borrowers to obtain mortgages, reducing the risk of widespread defaults.

• Stronger Financial Positions: Homeowners today generally have more equity in their homes compared to pre-crisis levels. This financial cushion could help prevent a wave of foreclosures if prices fall.

The Indian Context:

India's housing market presents a unique scenario:

• Uneven Growth: Price increases have been concentrated in major cities, while smaller towns have not witnessed the same surge.

• Limited Inventory: A report by the Ministry of Housing and Urban Affairs (MoHUA) estimates a shortage of over 20 million affordable housing units in India. This limited supply, particularly in urban centres, fuels price hikes for budget-conscious buyers.

• Government Influence: Government policies aimed at stimulating the housing sector, such as tax breaks, can further impact affordability. Programs like Pradhan Mantri Awas Yojana (PMAY) aim to increase the availability of affordable housing units.

Looking Ahead:

Is a Crash Imminent?
Predicting a housing market crash is difficult. While some factors raise concerns, others suggest a more contained scenario.

• Monitoring Interest Rates: As the impact of rate rises leads to mortgages getting repriced, affordability could be impacted, potentially cooling the market.

• Government Intervention: Policymakers have tools to address affordability concerns and prevent excessive speculation.

• Local Market Dynamics: The housing market is not monolithic. Conditions will vary significantly by region and housing type.

DISCLAIMER: This blog is solely for educational purposes and not to offer any investment advice. Please do your own research or consult a financial advisor before making any investment decisions.