HOUSING BUBBLE AND ITS IMPACT ON GLOBAL FINANCIAL CRISIS (2007)

Housing bubble or real estate bubble is one of the basic problems that lead to global financial crisis in the late 2000s. When people’s wealth substantially increased, they will spend or consume more on everything, including houses. People demand for a better and bigger homes until in the late 90s, consumption boom occurred. The increased in demand has triggered housing bubble and makes the bubble became bigger. When demand on houses increased, of course the prices would be increased too. Until some point, the demand decreases or becomes stagnant, but the supply is still increasing, it will lead to sharp drop in the houses’ prices. At this point the bubble burst. Basically, the main reason that triggered the bubble and made it bigger was the policies of the Federal Reserve back in 2003.

Referring to the reason, to avoid recession after the collapse of the tech bubble in 2000 and the 9/11 attacks in U.S during 2001, the Federal Reserve started to lower the interest rate from 6.5% to 1.75%. In 2003, the interest rate has been lowered to 1% and it remained there for a full year. However, the house prices were still growing up, higher than the interest rate. Even the house prices were growing at the rate of inflation, the Federal then encouraged people to buy houses. Federal has made an incentive so that people can go out and borrow at the rate of 1%. In addition, they created Fannie Mae and Freddie Mac, a privately owned, government sponsored mortgage houses to insure loans for people who couldn’t get them on the open market. Lending large sum of money into the property market has actually increased the level of personal debt. Interest has to be paid together with the loans. However, when debt rose quicker than incomes, some people became unable to keep up with repayments thus lead banks going