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How property bubbles can impact investors

When housing demand outstrips supply and property prices rise, the market can experience a ‘bubble’. It’s a phenomenon that affects investors alongside homeowners; things may look rosy as property values increase, but when the bubble bursts the value of investments can plummet.

And bubbles do burst. Increased demand often leads to increased supply – however, when this demand diminishes, prices can fall sharply. For investors, it pays to recognise when a bubble might be forming, as may already be the case in China and parts of Europe.

What’s happening in China?

China’s National Bureau of Statistics recently revealed that the price of new homes increased by 3.6% over the past year. This acceleration has particularly affected cities. In Shenzhen – between mainland China and Hong Kong – house prices have risen by almost 57% in a year. Shanghai, meanwhile, has seen around a 20% rise.

This price hike is partly being driven by investors wanting a slice of the property pie. Policy easing – combined with the cutting of interest rates and mortgage down payments on first and second homes – means that property has become particularly attractive as an investment. Following reductions on reserve requirements, banks are also more willing to lend. Some experts have warned that buying property should be made less appealing to avoid causing a bubble.

The situation in Europe

Luxembourg, Austria and Germany have all experienced property booms since the 2008 global economic crisis. House prices in Luxembourg have risen by nearly one third since September 2008, while in Austria values have increased by almost 50%. In urban Germany, prices have also risen by around a third. In the bigger cities, it’s more like a half. This has been fuelled by lenders offering super-low-interest mortgages to borrowers, even those with poor credit histories.

What do bubbles mean for investors?

Property investors usually either rent out homes or sell them for profit. While their returns inevitably take a hit when a bubble bursts, they’re also part of the reason why a bubble forms in the first place.

Investors’ influence on the property market increases when they speculate. House prices can remain artificially high when investors think a boom will continue for longer than it actually does. Problems occur when there’s a slowdown in demand – the bubble pops, prices drop and the investment return diminishes.

If you’re looking to buy property abroad, or are concerned about property bubbles affecting international money transfer rates, check out our guide to saving money when buying property overseas and keep up to date with our blog.

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