Real property is a controversial investment. Some believe that it’s the most profitable option for investment and that it has produced more wealth than all other asset class for middle and lower-income citizens. Some believe that real estate investments are not up to par with urban homes that are priced too high and are made accessible to the general public. The majority of people have to endure the burden of an occupation that they might not want to pay for the very high cost debt they taken on.

There are many views on the benefits of real property investment. But the fact remains the same. The real estate industry has been among the most volatile sectors if the last five years or so are taken into consideration. The old saying “safe as houses” does not seem to apply anymore.

In this piece we’ll speculate the possibility that this boom-bust cycle that is occurring in real estate is caused due to the availability of simple finance or lack of it.

Easy Financing

The boom in real estate across the globe is the result of the ease of financing. This is especially true in the case of emerging nations such as India. In these countries there no mortgage system prior to the end of the 80’s and beginning of the 90’s. The houses had to be purchased with cash. Therefore, only those who had substantial amounts of money were able to purchase houses.

This changed after the entrance of multinationals into India. Indian market. The Indian economy expanded exponentially, as did the system of banking. needed adapt to keep up with the growth. Banks began offering simple financing for real estate. You could make only 10% or less and make the rest in simple installments. This led to a huge influx of people willing to purchase homes despite the limited supply of houses. As time went by, prices began to spiral beyond control and have resulted in a property bubble. Nowadays, the price of a house in Mumbai is roughly the same as that of an one in London. But, the wages earned in Mumbai by Mumbai residents are lower than one fifth of the wages earned by London residents.

This indicates the enormous expansion in the Indian real property market is experiencing. Over the past 5 years, or more, the nominal price has been unchanged. This means that real prices have decreased by nearly 30 percent in the event that inflation is considered.

Securitization

Similar to this, the rise in property prices was also observed within the United States. The United States is not a developing nation like India. It has enjoyed a booming real property market for a lengthy time, and the financial systems are well-developed and stable. In the beginning of 2000’s, they launched a new type of financing.

They securitized loans that were secured by government guarantees and offered them for sale in exchange for debt security. These banks were able to have an almost limitless capacity to loan money to individuals. This is due to the fact that they didn’t have to keep loan on the books long. They could simply transfer the loan to a third party that manages them. The increased capacity to lend money, as well as the lack of risk, caused a flood of credit on the American market. The influx of money was again being used to purchase a small amount of homes, resulting in an unprecedented increase in price. When the securitization process ceased, the market saw a swift and massive drop in the price of houses. Whole neighborhoods were removed to limit supply, so that price of houses in other neighborhoods could not fall.

Lower Borrowing Rates

Japan was among the first nations to experience this huge real property boom and bust in their defunct 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. In order to fuel the boom in real estate prices, the interest rates were lowered to levels that were close to zero. In the end, a lot of money was generated on the market. The excessive amount of money was spent on actual assets. The costs of these assets hit new heights. When interest rates climbed property prices plummeted, and life savings were lost. Now, nearly three decades later, the price is still not at a similar amount. The Japanese homeowners continue to pay off their homes that they purchased at an extremely high cost.

Migration and Foreign Investments

Another important reason behind the boom in real estate is the growing number of immigrants. As the number of people who live in the area increases the demand for housing. This leads to an acute shortage of homes is created which puts an upward pressure on homes. But this isn’t the issue. The problem is that immigrants are often able to access to low-cost loans in their home country. Many of them will take risk of foreign exchange and invest in countries that are not their own. This is exactly what is happening in Canada since their housing market is mainly caused due to Chinese billionaires borrowing from in Canada and investing heavily into the Canadian real estate market.

In the end, to summarize, financing is a crucial component of any housing market. The price of housing cannot increase until you have the ability to access easy financing.