The time has come when talk of a rising real estate market is again on the agenda, and so it is perhaps fitting to have a little retrospective in order to understand what really happened in the Estonian real estate bubble, writes Tõnu Toompark on his adaur blog.
Let’s imagine that the bubble is a region of gas which is enclosed in liquid, and this surface tension keeps it under pressure, Tõnu explains. Experts believe that bubbles burst when they become irritated sufficiently.
They only bubbles which, in 99.9 per cent of cases, don’t burst are chat bubbles, says Tõnu. All other bubbles either empty with a slow hiss, or burst dramatically. The strength of the ‘pop’ depends on the activity of outside factors.
A real estate bubble is usually fuelled by speculative purchases from two main groups, says Tõnu. The first groups speculates on property in the short term, keeping it for a time before reselling (in the best case scenario with improvements made!) if banks’ intrest rates are enticing enough.
The second group, he goes on, treat their investments as something more like a cash machine, using the proceeds of a sale of real estate for reinvesting in a bigger project. There was a high degree of confidence during the last bubble that “nothing will happen to me” or that the bubble is so strong that it won’t ever burst, Tõnu says.
It can be argued from the statistics that the volume of this type of transaction made up a quarter of the total of real esate transactions. Money was readily available for investors, even for those whose primary activity was anything but real estate. Changes in the volume of real estate ownership could be used as a benchmark of success, Tõnu goes on.
Anyone can pop a soap buble by poking it. “Investors” enetering the market, naturally with the banks’ help, led us to the situation in 2007 when it was suddenly realised that the ‘surface tension’ of the bubble was so great that the time when the air started to come out of the bubble was imminent, writes Tõnu. The surface tension of the bubbe was now so thin that all the taps were immediately shut off, and for the last time.
Naturally, adverse criticism should be aimed not only at the banks but also at the government, where politicians continue to be populist in the run up to an election, and stressed the right of everyone to be a home owner particularly aggressively.
The net result was that all these dogmas were suddenly refuted, resulting in viable projects being halted and prices starting a steep decline. Thus there was a huge disappointment. Those who realised what the true nature of the bubble was started to sell all they could. Those who did not realise its true nature subsequently often went under.
But as with each ebb (read: bubble) comes a flow, every increase also leads to another bubble. Real estate agents are already advertising the advent of all types of investors. Thus it can be said that the only bubbles which are not prone to bursting are conversation bubbles!
The original article (in Estonian) can be viewed here.