A housing bubble is a period of excessive speculation in the housing market, causing prices to inflate to unsustainable levels. It is usually caused by a combination of speculation, low interest rates, government-sponsored home ownership initiatives, and loose lending practices.

When a housing bubble occurs, buyers, either irrational or out of necessity, enter the market and drive up prices to the point where home-owners are unable to make their mortgage payments. This can lead to a real estate market crash, as happened in the United States during the 2000s, when millions of mortgages were defaulted leading to the global financial crisis.

The warning signals of a housing bubble usually include a rapid increase in housing prices, along with strong growth in demand from non-traditional buyers and investors. Historically, when interest rates are low and investors are flush with cash, it coincides with a rise in housing prices. Government policy to encourage home ownership can also lead to a housing bubble, as the additional influx of money and buyers into the market drives up prices.

In addition to unsustainable housing prices, there are other significant risks associated with a housing bubble. A prolonged market lull where prices remain stagnant and sales activity is slow can cause homeowners to default on their mortgages, dragging down an entire economy. This is especially true in markets with highly leveraged mortgages and high repayment thresholds, such as the United States in the early 2000s.

The aftermath of a housing bubble can include an over-saturated listing market, where desperate sellers and buyers are no longer willing to purchase overpriced homes. Foreclosed homes dumped onto the market will drive down prices and reduce economic stability, leading to a drawn-out period of distress.

The best way to mitigate the risk of a housing bubble is to create a solid foundation of laws and regulations that are designed to provide stability within the housing market. Regulators can also provide safeguards that prevent excessive speculation and loaning practices, such as establishing minimum down payments for home buyers. In addition, governments should implement broad-based policies to promote economic growth and improve the availability of housing for low-income individuals and families. Finally, transparency and communication across all stakeholders, including borrowers, lenders, regulators and legislators is essential to preventing a housing bubble from developing.