How can government policy influence the occurrence of a real estate bubble?

Government policy can significantly influence the occurrence of a real estate bubble through various means, one of which is promoting easy access to credit. When credit is readily available, more individuals and investors can obtain loans to purchase properties. This influx of new buyers into the market can drive up demand, leading to increased property prices.

Lower interest rates and relaxed lending standards often encourage speculative buying, where investors purchase properties not necessarily for their inherent value or rental income potential but with the hope that prices will continue to rise. This type of environment can create a situation where housing prices escalate quickly, outpacing economic fundamentals such as income growth. If prices rise dramatically, this may create conditions for a bubble, as buyers might be motivated by the market's upward momentum rather than the intrinsic value of properties.

Once the bubble reaches its peak, if there is any change in the availability of credit – such as tighter lending practices – it can lead to a rapid decline in prices as buyers withdraw from the market, leading to potential financial instability. Thus, promoting easy access to credit can be a catalyst in creating a real estate bubble by significantly altering buying behavior and market dynamics.