What is one way to mitigate the impact of a real estate bubble on the economy?

Increasing interest rates is a recognized method to mitigate the impact of a real estate bubble on the economy. When interest rates are raised, borrowing becomes more expensive, which can slow down the demand for housing as potential buyers face higher monthly mortgage payments. This decrease in demand can help stabilize housing prices and prevent them from inflating further, thus reducing the risk associated with a bubble burst.

Additionally, higher interest rates discourage speculative investments because the cost of financing such investments increases. Investors are less likely to purchase properties solely for the purpose of reselling them at a profit if the cost of borrowing is high. As a result, a more stable and sustainable real estate market can be achieved.

In contrast, the other options would tend to aggravate the situation or promote an unsustainable market. Speculative investment, for instance, can lead to rapid price increases and, ultimately, a more severe correction in the market when it inevitably bursts. Reducing taxes on real estate transactions or implementing more lenient lending practices could further fuel demand and exacerbate the bubble rather than mitigate its impact on the economy.