The real estate market world-wide is going through one of the worst slumps in living memory. Like all markets, the real estate market is cyclical and naturally goes through cycles of boom and slump. The current environment is more serious than many of the slumps of the past. The global financial crisis and credit crunch has had a dramatic impact on the value of homes. The real estate market is unlikely to rebound soon. A recovery will only occur once the global financial crisis starts showing signs of being solved.
The crisis began with free flowing credit being issued against overvalued properties. Many of the borrowers were unable to afford these loans and defaults began to occur. At the time of writing, November 2008, the world's economies are experiencing a major down-turn. Europe is officially in recession. The harsh economic reality of a down-turn or recession means that less money is available to finance property investment. Home owners are feeling the pinch.
In this climate, most people are simply trying to hold onto what they have rather than invest in something new. Those that have lost their homes are unlikely to re-enter the market in the near future.
The banks themselves have now taken a more conservative approach to issuing credit. Obtaining credit for a home loan is suddenly not easy. Banks have been hard hit through poor investment strategies. What seemed like a good investment little over a year ago now appears risky. Billions of dollars have been lost. Many banks around the world owe their survival to government bail-outs.
The effects of the banking investment disaster affected not only the banks. Other banks and financial service business may still follow. Banks that seem to be above water now could be swamped tomorrow. Governments are using taxpayers' money to finance rescue plans. That money has to come from somewhere meaning that vast sums have moved out of the economy.
A recession or a downturn means that unemployment is set to increase. More people will be walking the streets in search of work. Wages and salaries are likely to fall in real terms and the total value of the economy - the gross national product - is bound to fall.
What all this means is that there is less money available for people to spend on property. As long as the crisis continues to deepen the hope of an early real estate market recovery is in vain. A rebound will happen once the recession has bottomed out and the world's markets and economies begin to show signs of stability. The property market recovery may lead the broader economy towards recovery. No-one knows how long that will take.
In the meantime you may buy as many bargains as you can, but be prepared for a long wait before turning in a profit.
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