REad the below report - sound like Australia? well actually its Canada, the only real notable difference is the difference in how much they've gone up there. Only 19 per cent in 5 years?? " In Canada's largest city, average house prices went up 19 per cent after inflation since 1995 and 5.8 per cent last year alone."
Let me tell you Canada, 'that ain't a bubble, this(australia) is a bubble' .
Report says property bubble ready to burst
ELLEN ROSEMAN
When share prices tumbled, many investors took shelter in real estate and bid up prices to lofty levels.
Now there's a property bubble that is close to bursting, says The Economist magazine in its current issue.
If you're counting on your house or your real estate investments to keep climbing in value, this 16-page report makes sobering reading.
More people own homes than own company shares — just over 60 per cent of Canadian households are homeowners — and they expect rapid house price gains to continue.
Such expectations lie at the heart of all bubbles.
The boom in the property market in the past few years has boosted consumer spending by making people feel wealthier, offsetting the effect of falling share prices.
Consumers have been able to borrow against the higher value of their homes, generating windfalls that are spent on cars or holidays.
But just as rising house prices help increase spending, so falling house prices can cause economic pain.
People who borrowed too much have to cut back their lifestyle expenses.
Some end up with homes that are worth less than what they borrowed.
This has an impact on lenders, who have bigger portfolios of non-performing loans, shrinking collateral and a diminished capacity to lend for other purposes.
Property markets are more prone to bubbles than stock markets for three reasons, says The Economist:
There's no short selling. Short sellers, who sell something for future delivery they don't currently own, hoping to buy it back more cheaply later, act as a constraint on rising stock markets. But with no futures or options markets for property, a few optimistic investors can push prices above their equilibrium level.
Construction lags are the rule. New properties may take years to complete and by the time they're built, demand may have fallen and prices may slump. Worse still, there are often periods where supply continues to increase even as prices decline. These supply lags encourage a boom-bust cycle.
Lenders have perverse incentives. They lend as much as possible when property prices are rising, often relaxing their lending standards, as inflation boosts the market value of the collateral on their existing loans. But they pull out when prices fall, resulting in a credit crunch that can amplify the impact of falling prices.
Governments are not blameless, either. By keeping interest rates low to cushion the economy from a slump in share prices, they may have inflated a housing bubble.
"A bubble can never be positively identified until after it has burst," the report says, "but the rapid increases in both house prices and mortgage debt should set alarm bells ringing."
The countries with housing bubbles — and most likely to have a housing bust — are Australia, Britain, Ireland, the Netherlands, Spain and the United States.
While Canada does not appear to be in danger, since our average house prices went up only 2 per cent after inflation from 1995 to 2002, Toronto may be vulnerable.
In Canada's largest city, average house prices went up 19 per cent after inflation since 1995 and 5.8 per cent last year alone.
"In a world of near-zero inflation, double-digit returns are no more sustainable on houses than on equities," the magazine concludes.
"Next time an exuberant real estate agent tells you that bricks and mortar are the safest thing you can invest in, hit him on the head with this copy of The Economist."
