The basic definition of a bubble is when an asset increases dramatically in price, so much so that the price seems unrealistic.

There is a large consensus on the idea of an economic bubble, whether it is housing, tech or stock market bubbles and that is that bubbles are driven by supply and demand.

Real estate prices often reflect the state of a country’s financial health.

Housing affordability is often interconnected to a housing bubble and there are a number of factors that influence affordability, such as:

• Economic growth
• Population growth
• Wage growth
• Energy prices
• Job growth
• Job decline

Construction booms in high density living is generally seen as a strong factor in the rise of property prices as well as strong population growth, offshore demand, risky lending practices, easy access to credit and a lack of financial literacy in first time home owners.

Interest rates have a profound effect on property prices and the lower the interest rates, the higher the demand for real estate. In addition, government tax incentives can also encourage more people to enter the market which also increases supply and demand and affects property prices.

Economists who favour the idea of a housing bubble generally consider the following factors as signs of a bubble that may be about to burst:

• An emotional element behind the rise in house prices ie fear of missing out etc
• Easy access to credit and risky lending opportunities
• Sharp rises in the gradient of house prices
• Ratio of investor lending for speculators matches the rise in prices
• Are the demographics who drive the economy being priced out of the market and living close to work?
• Extended periods of growth that far exceed historical trends.

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