The real estate industry has been one of the most lucrative investment opportunities for people worldwide. Housing and business developments dominate most economies in the world today. It has realized phenomenal growth over the last decade that has prompted people to increase the economic resources spent on this investment sector. However, lately there is growing concern over the financial viability of these investments worldwide. Below are three major reasons for the real estate bubble burst.
Rise in interest rates
At the beginning of the century, the interest rates charged by various financial institutions for credit facilities issued to people. These low rates attracted people to the idea of purchasing homes that were more expensive than they could afford on their incomes. People with low credit scores who would ordinarily be denied loans were given mortgages at low rates. However, that was at a time when there was an explosion in investments. Bank managers sold these bad loans to managers of hedge funds who were deceived to think they were watertight investments. However, this was not the case. However, as time passed and with increasing inflation rates, it was no longer possible to have these low interest loans. The rising interest rates combined with reducing incomes caused a rise in number of foreclosures on homes that owners could no longer afford to pay for.
High prices of property currently
Currently, the price of purchasing a home is quite high. This combined with the high interest rate of borrowing makes these housing units unavailable to most people. The structure of the real estate market is such that as new people get into the industry purchasing cheap homes, more and more people can afford the more expensive ones. However, with the increasing number of foreclosures, there are more homes available at high prices and less at low prices.
Changing psychology of investors
Earlier, people saw the returns on investments from real estate and decided to place their money in this sector. This yielded a herd mentality whereby every one with disposable income preferred to invest his/her money in real estate rather than any other sector. Effectively, the market became flooded with dozens of idle investments. The speculated profits were not realized and therefore, many investors ended up with losses.
The herd mentality has been blamed for most of the bubble bursts of the past. This includes the stock market, the internet and now real estate. It is important to beware of this before investing.