I have been reading about the worsening housing/rental market, COL and worrying inflation figures as a whole. Seeing lots of talk about this mythical “bubble”- people saying things like “the bubble is about to pop”, and “welcome to the bubble” blahblahblah **BUBBLE**. Seems like this is a common term/knowledge in economics but I don’t fully understand… please eli5 🙂
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A bubble is a situation where something only has value because you expect to be able to sell it to another buyer in the near future. This incentivizes people to buy that thing as an investment, since it increases in value. But as more people buy it as an investment, the faster it increases in value, and then that draws more people to invest.
Eventually you run out of investors and whoever bought at the peak of the bubble is in trouble. They can’t find someone willing to buy their share of that thing for any higher than what they paid, which effectively makes their ownership stake worthless, since the only reason they bought it was to sell it for more. So they’re gonna start selling at a low price to try and cut their losses, which then triggers other investors to sell at a low price to try and cut losses, since this signals that the market price has stopped going up and this thing is no longer a good investment.
Things that can generate money for you by just holding them, like stocks, bonds, and real estate, are less likely to create bubbles, although it’s still possible. If you can make money just by holding your investment, then there’s no need to find a buyer at a higher price. You’re perfectly content to just wait and collect your steady profit from holding.
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