When we see our net wealth increasing on paper most of us feel richer and more confident, which can lead to spending more. This is called the wealth effect.
Along with this spending we often accumulate more debt. The risk this presents is that when property or share markets decrease, we find we cannot sell assets or pay down debt.
Price bubbles are unsustainable increases in property or share prices. They are often fuelled by people borrowing more to buy into a rising market.
Price bubbles are often followed by either price stagnation (no increase in asset values) or a market correction (declines in asset values), which brings asset prices back to a more long-term average.
Even if you are looking good on paper, it is always worth considering what you can afford if the market takes a dive before taking on more debt .
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General advice disclaimer
This is general information only and does not take into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for you having regard to your objectives, financial situation and needs and consider obtaining independent professional advice before making an investment decision. If information relates to a specific financial product you should obtain a copy of the product disclosure statement for that product and consider that statement before make a decision whether to acquire the product.