Housing Bubble

World practice is full of stories about economic bubbles, the latest one being the housing bubble in global real estate markets. Typical of a housing bubble is the rapid increases in real property valuations until unsustainable levels are reached relative to the growth of incomes, and other economic elements of affordability, followed by a decrease in price levels. As a result of house prices rising faster than earnings, housing affordability in the developed countries declined significantly over the last two decades.

In 2005, The Economist warned that property prices have never risen so fast in such a short period and in so many countries. According to experts, high prices create conditions for inflation of housing bubbles, the bursting of which could have serious consequences for economies around the globe. Much to investors regret, who disregarded the warnings, projections proved fairly accurate, even though a few years later.

Some of the economies greatly affected by the recent housing bubble were the United States and United Kingdom, among others.

The housing bubble in the United States is believed to have contributed to a certain extent to the latest financial crisis as housing bubbles reflect not only on home valuations but also on many other branches of the economy.

Throughout USA, house prices reached their top in the early 2005 and started to decline the following year. They are expected to hit the bottom in 2010.

Unlike the United States where house prices have risen 155 percent over the last decade, the United Kingdom witnessed a significantly higher rise of more than 300 percent over the same period thus causing an affordability crisis on the British housing market. According to statistics, prices have peaked at 5.75 times the average earnings.

Whilst the bubbles in the United States and United Kingdom have finally burst, Canada and Australia are on the verge of a similar scenario.

Though Canada’s central bank stated that it was premature to speculate on the existence of a housing bubble, Stephen Dzharislovski, one of Canada’s richest investors, is convinced of the opposite and claims that government measures are required. At present, mortgage lending is encouraged and will fuel the bubble bursting. Furthermore, the Canadian Real Estate Association has recently warned that property prices will reach record levels. Home sales will increase by 13 percent and the average price will rise by 5.4 percent in 2010.

In a similar fashion, Australia fears a housing bubble on its market. Reasons for the concern are the lack of new homes for sale, along with interest rates that are at their lowest since the early 1960's.

The housing prices began to rise again after a decline in 2008, with the average price in major cities reaching a 4.5 percent level. Although these increases are far from the price jumps in the United States and other countries, lawmakers are worried that housing prices may rise faster than the ability of consumers to afford them - an early sign of a nascent bubble.

In view of the financial crisis, bank experts recommend that a safe mortgage is no more than three times the annual income of the buyer, with 20 percent downpayment. However, in the coastal areas of the USA, buyers are still putting just 3 percent down and borrowing around six times their annual income. Many persons who borrowed before the financial crisis cannot pay the money back. On the other hand, they spent the money on residential properties that are worth less than the borrowed amount. If banks are not aided by the government, they go bankrupt.