What a Housing Bubble Is and Why It Is a Problem for the City

A housing bubble is the situation in which the price of housing detaches from its fundamentals, the rents it can generate and the wages that can pay for it, and is sustained only by the expectation of selling it dearer to somebody else. A sixty square metre flat in an ordinary neighbourhood gets three viewings the same morning: the first person wants to live there and works out what will be left after the mortgage, the second wants to let it and works out the annual yield, the third will never sleep there and works out what it could sell for in four years.

All three bid for the same object, but only one is buying a home; the other two are buying an asset. The question is which use wins when the same property serves for living and for investing, and what happens to a city when the same one always wins.

What a bubble is and is not: price, fundamentals and credit

Something being expensive does not make it a bubble. A bubble appears when the marginal buyer no longer buys for use but for resale, and its fuel is always abundant credit: at that point the market stops pricing homes and starts pricing expectations, and expectations correct all at once. That is why a flat is not always a good investment.

Whoever bought at the peak of the previous cycle in Spain took more than a decade to recover the nominal price paid and considerably longer after inflation; a home is a leveraged, illiquid, indivisible asset concentrated in a single point of the territory, with transfer taxes, notary fees, service charges, special levies and maintenance. Buying to live is reasonable, because it swaps rent for a mortgage payment and protects against rises; buying in the expectation of automatic appreciation is a bet.

Is there a bubble today? Moderate overvaluation without runaway credit

Whether there is a bubble today requires separating fact from interpretation. The Bank of Spain estimates a moderate overvaluation, a few percentage points above long-run equilibrium, while a European Central Bank indicator puts it considerably higher; but structural conditions look nothing like the cycle that burst in 2008: mortgage standards are stricter, fixed rates predominate, household debt is lower and the problem is a shortage of supply, not an excess. The honest interpretation is uncomfortable for both sides: there is no classic credit bubble and, even so, access is worse than ever. That can only be explained by the second transformation, financialisation.

Financialisation: Aalbers, Rolnik and the best global bidder

The geographer Manuel Aalbers has been describing it for years: housing has gone from durable consumer good to the main collateral of the global financial system, and the world's savings, seeking stable returns, find in urban property a relatively low risk; that is why institutional money dominates residential investment above developers and public administrations. Raquel Rolnik puts it another way: when housing becomes a financial asset its social function becomes secondary, because the asset does not need anyone living inside to fulfil its purpose. The consequence is that the price is no longer set by the local wage but by the best global bidder.

Spanish figures, the counterargument and the priority of use

Spanish figures show it. Around 14 % of purchases are by non-residents, and in some coastal provinces the share is close to 40 %; an average family needs about seven years of gross income to pay for a home, when the threshold considered sustainable is close to four, and in the big capitals the figure soars. The age of first purchase shifts toward the late thirties and family help becomes decisive: inequality is inherited. The counterargument deserves respect: investment finances new construction, sustains the professional rental stock, which in Spain barely reaches 8 % against close to 20 % in other European countries, and creates jobs; most landlords are individuals with one or two homes that are their pension; and penalising investment can reduce development.

It can still be argued that the problem is not investment but its priority. A city can need capital to build and decide at the same time that housing serves first for living: taxation that distinguishes the primary residence from investment property, limits on speculative purchase and tourist use, a public and affordable rental stock that sets a reference price and regulation that stops the best global bidder from displacing the local wage. Life in a bubble is bad because the price of the home no longer speaks about the home, and housing policy consists in giving it back its voice.