Over the course of the COVID-19 pandemic, the housing market saw a resurgence and in 2020 house prices soared by 31%. But prices cannot continue to increase forever. Is the current impressive run a bubble?
House Prices vs. Cheap Borrowing
One reason for soaring house prices is cheap borrowing. Interest rates were low for a long time prior to the pandemic. Now, they're on the up again. The era of cheap debt may well be over. If it is, that could mean the recent impressive run will soon come to an end. Many analysts and prospective buyers are wondering if current prices are sustainable. And, if they aren't, when will the bubble burst?
Housing Bubbles Aren't as Common as They Seem
Most people who are buying homes today will be old enough to remember the 2007 housing bubble and the resulting 2008 financial crisis. But historically, housing bubbles aren't actually that common. There have been other booms and busts, such as the 1929 stock market crisis, but overall, markets are typically efficient. Price trends follow supply and demand, so artificially inflated prices don't usually spiral out of control. The housing market may be "exuberant" right now, but not irrationally so.
The 2008 Crisis Was Caused by Lending Decisions
The 2008 financial crisis wasn't caused just by house prices. Lending decisions, such as self-certified mortgages, and complex financial products such as collateralized debt obligations, allowed an irrational market to continue for longer than it should have. Today, the markets are more regulated, so it's unlikely history will repeat itself in such a spectacular fashion.
Timing the Markets is Impossible
Prospective buyers should remember that timing the markets is impossible. Nobody knows what the future holds, so those who can afford a house, and who have found one they would be happy to live in, should base their buying decisions on that, rather than gambling on what may or may not happen to house prices tomorrow. Talking to a qualified financial advisor is an important part of making any major decision about mortgages.