Housing Bubbles & Musical Chairs
A housing bubble can be described as a game of musical chairs. In which, the increase in credit expansion is confused for real loanable funds. Here, people purchase investment property with lower interest rates. This increases asset prices and so the boom inflates the housing bubble, during which a house worth $500k at the first auction then accumulates $600k at the next auction. Which depending on the growth rate could be in a few months or years. Alternatively, it could increase in price as a result of renovation or simply a quick fix of the garden gate. Lets say this process continues to $700k and then again $800k, how long the process will continue depends on peoples future expectations and price valuations towards the property.
It is now evident when it reaches $900k that there is a major difference between the price of a house compared to ones income. Finally, the house is sold for $1 million just as the inevitable housing bubble bursts. Now, no one is willing to purchase the house for the current $1 million price not to mention a higher price. And so the metaphor of the ‘musical chairs game’ is used to describe this process, where the players who have a chair only do at the expense of the one who is left without a chair. As whoever purchases at the final point takes the total loss of $500k as they have to lose at the expenses of all the previous investors gaining $500k.
Featured image supplied from Unsplash (edited).
Copyright © 2016 Zoë-Marie Beesley