Photo by Becks, acquired via Flickr.com

When the Bubble Pops...

Posted May 28th, 2015 under smart buying, smart selling.

By now, you have probably heard that we’re in a “housing bubble”. What does that mean, and how will it affect you and your plans?

To understand what’s going on in the market today, we need to take a trip back 35 years, to the last bubble.

1980 to 1990: A Rising Market

Home prices in 1980 were nothing like they are today. The average detached home sold for $81,000; the average townhome for $45,000. A semi-detached house would run you $60,500, and an apartment a mere $39,000.

From 1980 to 1990, prices rose very quickly. The total rate of inflation for the decade was 81.9%, but house prices rose by triple that rate, for a total increase of 240%!

The real estate market was on fire, and the investment opportunities seemed limitless—then the crash came.

1990 to 1995: The Crash

During the crash of the early 1990’s, house prices rapidly dropped by 25–30%. Some areas suffered a little more or a little less, as did some types of home.

But there was no denying the fact that the market had experienced a massive price adjustment over several painful years.

1995 to 2002: Recovery

Even in 1995, house prices were still high compared to inflation. The total inflation rate for 1980–1995 was 104.7%, whereas the average house price was up about 140%–150% over the same time period. Prices continued to rise during this period, and at the end of 2002, they passed the peak prices of 1990.

2002 to 2015: Rapid Rises Return

Despite the global recession of 2008, house prices have continued to rise faster than the rate of inflation.

For the period 2002–2015, the total inflation rate was 44.8%. The average house price went up by 162.7% over the same period: once again, triple the rate of inflation.

2015 and Beyond

Prices are inflated just as badly as they were in 1990, and something has to give eventually.

We will either go through a fast, painful crash like we did in the 1990’s, or enter a period of slow growth that lasts for many years as inflation catches up to house prices.

My Advice

If you’re planning on staying in your home for five years or more, you should be able to ride out any dips in the market.

If you are planning to downsize, you should make a move soon to capitalize on the difference in prices. However, if you are moving up, you can take your time.

No matter what, I would advise you to watch the market and be willing to change your plans if necessary.

The Statistics

19801990199520022015
Apartment$39,000$146,000$108,000$151,000$231,000
Townhouse$45,000$159,000$118,000$160,000$302,000
Semi-Detached$60,500$196,000$149,000$210,000$424,000
Detached$81,000$245,000$185,000$262,000$552,000
Total Inflation0.0%81.9%104.7%132.2%196.5%
Total Price Rise0.0%240.0%154.4%253.4%553.1%


Want to know more about the real estate bubble and how it might affect you? Just ask me, I'll be happy to help.

--Peter

Get monthly real estate advice in your inbox, free! privacy policy