Property bubble

A property bubble forms when property prices rise above their fundamentally justified value – driven by speculation, cheap loans and over-optimism.

How a bubble forms:

1. Low interest rates: loans become cheap → more people buy
2. Rising demand: more buyers → prices rise
3. Speculation: "Property always goes up!" → even more buyers
4. FOMO: "If I don't buy now, I'll never be able to afford it!"
5. Bubble: prices no longer bear any relation to reality (rental yields 2%)

How the bubble bursts:

• Interest rates rise (ECB 2022: 0% → 4.5%) → loans become expensive
• Buyers can no longer afford the instalments
• Demand collapses → prices fall

Germany 2022–2024:

• Property prices fell 5–15% (depending on region)
• New construction slumped by 40% (developer insolvencies!)
• No "bubble" in the American sense (no subprime loans), but a significant correction

Historical bubbles:

• USA 2006–2008: the house price crash triggered the global financial crisis
• Spain 2008: prices fell by 40%, ghost towns
• Japan 1990: property crash – prices only recovered after 30 years