There are two ways to increase the price of any item; either the demand increases or supply reduces. A hike in the demand for an item always results in the appreciation of its market value as long as the supply remains fixed. A reduction in supply, on the other hand, means not enough to go around, resulting in a higher valuation for the available. Hence, the reason why the red diamond remains the most expensive gem in the world due to its rarity.

Buoyed by positive sentiments and easy access to credit facilities, the increase in demand for an item may result in a boom. Characterised by increased commercial activity, these medium to long-term periods of rapid market growth is the pursuit of every business and sustaining it, their goal. Output increases, investment, and job opportunities open up, and prices climb up sharply, driven by market enthusiasm.

Strong investors’ confidence and demand is the driver behind the market boom. Investors’ confidence in a “bright” future always translate into more purchases in anticipation of selling at a higher price in the future, resulting in speculations. The increased purchasing demands means companies have to boost supply by acquiring the necessary manpower for raising production level. With easy access to capital and liquidity, investors, businesses, and now speculators can borrow at very low rates, stimulating more demand. But what happens when the market overheats from the friction caused by demand outstripping supply or too much money chasing a limited supply? A bust is on the horizon

It doesn’t matter how well or carefully managed, a bubble will always bust in the end, especially one carried by euphoria and a callous disregard for caution. Such was the state of the real estate industry in the early and mid-2000s where the mania over owning a house grew to such alarming levels that strict lending requirements were abandoned and interest rates drove into the ground. The mania drove speculators into the market, who were flipping houses for quick gains within a short period of time. At its peak, 30% of the market valuation was supported by speculative activity

Most house owners rarely entertain the thought of the value of their homes decreasing. While the real estate market may not exhibit the pricing bubbles inherent in other asset classes due to the substantial cost of transaction, owning, and maintaining a house, it’s not immune from emotions, enthusiasm. and the irrationality of it all. However with no fundamentals supporting the price, rampant risky behaviors, and overzealous investment, it wasn’t long before the bubble busted.

As prices started to plummet, nervousness sets in, followed by massive sell-offs that eventually outstrips demand. With housing prices declining and mass mortgage defaults, millions of properties eventually wounded up getting foreclosed. These potential investment opportunities continue to lie fallow in a market that has long since rebounded, remaining a closely guarded of an elite few — the same elite responsible for its downturn.


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