Real property is a controversial investment. Many believe that it’s the best option for investment and has generated more wealth than all other asset classes available to the middle and poor. Some think that real estate investments are not up to par with urban homes priced too high and made accessible to the general public. Most people have to endure the burden of a job they are not happy with and pay for the very high cost of debt they take on.

There are many opinions about the value of a real property investment. But the fact remains the same. The real estate market has been among the most volatile when the last five years or such are regarded. The old saying “safe as houses” does not appear to apply anymore.

In this piece, we’ll speculate the possibility that this boom-bust cycle that is occurring in real estate is triggered by the ease of financing or the absence of it.

Easy Financing

The rise in property prices across the globe is due to the ease of financing. This is particularly true for developing nations such as India. In these countries, it was not a mortgage-based system prior to the late 80s or the beginning of the 90s. Homes had to be bought with cash. So, only those with large sums of money were able to get houses.

This was changed by the arrival of multinational companies into this Indian market. The Indian economy expanded exponentially, as did the system of banking. They needed change to keep up with the rapid growth. Banks began to offer simple financing for real estate. The borrower could pay just 10% or so and make the rest in simple installments. This led to a massive influx of people willing to purchase homes despite the limited supply of houses. With time, the prices began spiraling beyond control and have resulted in a property bubble. Nowadays, the price of a home in Mumbai is around the equivalent of a property in London. But, the wages earned in Mumbai by Mumbai residents are just five percent of those that are paid to London residents.

This indicates the enormous expansion in the Indian actual property market is experiencing. In the last few years, the nominal cost of property has stayed the same. This means that the actual prices have decreased by nearly 30 percent when inflation is taken into consideration.

Securitization

Similar to this, the rise in property prices was also observed within the United States. It is important to note that the United States is not a developing nation like India. It has been thriving in the real property market for a long time, and its financial systems are well-developed and stable. At the beginning of the 2000s, they began to introduce a brand new type of financing.

They securitized loans that were secured by government guarantees and offered them for sale through exchanges to be sold as bonds. These banks were able to have the possibility to lend money to the public. This is due to the fact that they were not required to keep loans on the books for too long. They could offer the debt to a third party that manages them. The increased capacity to lend money and the lack of any risk caused a flood of credit on the American market. The excess money was again used to buy a slender stock of houses, leading to an unprecedented cost increase. When the securitization program ceased, it caused a rapid and unprecedented drop in the price of homes. The entire neighborhood had to be destroyed in order to decrease supply to ensure that the cost of houses in other areas was stopped from falling.

Lower Borrowing Rates

Japan was among the first nations to experience this substantial real property boom and bust in their waning decade. The prices for property in 1985 soared to levels that it was no longer possible for the average person to afford a home in Japan. To support the boom in real estate, the interest rates were lowered to levels that were close to zero. Again, too much money was created on the market. This excessive amount of money was spent on tangible assets. This meant that the costs of these assets hit new heights. As interest rates increased and property prices fell, they plummeted, and the savings of people’s lives were lost. In the present, more than three decades later price still needs to be at a similar amount. The Japanese homeowners are still paying for the homes that they purchased at a price that was astronomically high.

Migration and Foreign Investments

Another reason for the boom in real estate is the growing number of immigrants. As the number of people who live in the area increases and the demand for housing. In the end, there is a shortage of housing, and it puts upward pressure on houses. But this isn’t the main issue. The issue is that migrants are able to gain access to low-cost loans in their home country. Many of them prefer to accept the risk of investing in foreign exchange in foreign countries. This is the situation in Canada because their housing bubble is mainly caused by Chinese billionaires, who have borrowed from the home of their families and invested heavily in the Canadian real-world markets.

To summarize, financing is an essential component of any housing market. Prices can only rise once you have an easy way to finance.