1743 Aerlan housing bubble
(WIP) The 1743 Aerlan housing bubble was the sharp running up and subsequent collapse of house and real estate asset prices that is affecting Aerla. House prices had been increasing since the tail end of the Fitzroy administration in 1738 AN, and was exacerbated by the National Reserve increasing interest rates under the presidency of Michel Sabbagh. As real estate prices began to stagnate in late 1742 AN, many homeowners began to default on their mortgages. By early 1743 AN, the Aerlan Home Price Index reported that prices had began to plummet to "concerning" levels.
Background
Since Aerla's independence in 1709 AN, the price of housing had grown at a steady level, driven by a combination of low interest rates, housing shortages, and investors buying up the already short supply of houses in cities. Cities such as Noursala, Agalore, Auburn, and Sheaville saw increasingly competitive bidding wars, driving prices for these homes well beyond the realm of affordability for new homeowners. This forced many younger people into either renting properties or buying homes outside of desirable locations.
The Greater Noursala Act of 1743 greatly exacerbated this trend. The news of the legislation, which is slated to take affect in 1745 AN, caused housing prices and mortgage rates in the former suburbs in the Municipality of Noursala to be increased substantially. This caused many low to middle-class families in the area to default on their mortgages.
Interest Rate Hike
To combat what President Sabbagh deemed to be "ridiculous levels of inflation", the National Reserve began to hike interest rates beginning shortly after Sabbagh's inauguration in 1740 AN. Under the Cassian and Fitzroy administrations, interest rates had remained relatively low. However, with the increasing rates under Sabbagh, more and more homeowners (especially those with variable-rate mortgages) were finding themselves unable to afford their monthly mortgage payments.
Shortage of Affordable Housing
In the face of the rising interest rates and inflation, consumer spending began to tighten. Average people and families were unable to cope with the skyrocketing cost of houses. This hit the middle class the hardest, which was the traditional backbone of the housing market. These people found themselves prices out of the housing market entirely, leading to a reduction in the overall demand for housing.
Overleveraging by Investors
Many investors began to take increasingly large loans to buy and build homes, betting that the market would continue to appreciate. However, as the pricing of homes began to stagnate and subsequently dip, investors found themselves owing more money to their lenders than what their properties were worth when the demand for housing began to decline. This flood of distressed properties onto the market pushed prices lower as the bubble began to burst.
The Crash
In early 1743 AN, the National Assembly passed the Greater Noursala Act of 1743, which greatly exacerbated this trend. The news of the legislation, which is slated to take affect in 1745 AN, caused housing prices and mortgage rates in the former suburbs in the Municipality of Noursala to be increased substantially. This caused many low to middle-class families in the area to default on their mortgages.
Housing prices hit their peak around a week after news of the GNA of 1743. Afterwards, housing prices in all major cities in Aerla began to stagnate. Within a few months, this downturn accelerated. By the end of the month, prices were plummeting. Homeowners, especially those who had bought properties in the last few years with little equity, began to default on their mortgages. This ripple effect was immediate. As mortgage defaults skyrocketed, many banks were forced to foreclose on homes. This led to an excess of properties on the market, further driving prices down. The homes, which had been valued at several hundred thousand felt, were suddenly selling for over half that amount, if they sold at all. Consumer confidence also took a massive hit. Potential buyers that feared that prices could fall further held off on purchasing homes. Investors who had once seen real estate as a reliable hedge against inflation began pulling out in droves, preferring to liquidate their assets and move into safer investments. As the market continued to spiral downwards, industries tied to construction, real estate, homebuilders, and suppliers began massive layoffs off workers. The national unemployment rate, especially in areas dependent on housing construction, soared, which leading to even less demand for homes.
Several banks who lent money to homeowners began to fail. Bank of the North, the 4th largest bank in the country, failed under the weight of the shear numbers of defaulted mortgages on their hands. Several other regional and local banks and lending companies also failed, which caused bank runs.
Aftermath
Legislative Response
In 1743.5 AN, roughly two months after the Aerlan Home Price Index had declared the housing bubble had been popped, the National Assembly tabled the Aerlan Housing Stabilization and Relief Act of 1743. The act seeks to lower interest rates on homes and bail out qualified borrowers that were deemed to have received unfair or predatory loans by banks.
