Reply #20: US house market boom set for bust?

[RawMaterials]

Is the current property boom an unwelcome replay of the dot.com bubble of the late Nineties and destined to burst in the same way, showering a lot of people with a lot of pain?

In financial crazes, there's usually a general frenzied belief that the old rules of economic gravity have been superseded - but are we about to (re)learn the hard way that prices that go up can come down with a bump?

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Sharp price rises

In February, the government in the United States reported the biggest monthly rise in sales of new homes in four years.

Rising interest rates are prompting people to buy early in the belief that prices will rise.

In New York, Miami, Los Angeles and San Diego (fastest of all), the price of an average family home has pretty well doubled in the last five years.

Twenty years ago in the United States, the price of a middle of the range home would have represented about five years of income for the house-holder.

Now, it's nearly eight years.

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Limited upside?

But caution does seem to be in order.

There can't be any certainty that property prices will continue their steep, relentless rise, particularly since interest rates are going up, perhaps higher than previously feared if oil starts to inject inflation into the economy.

And rising interest rates ought to give some pause for thought to anyone thinking of borrowing big sums to buy assets that may not rise in price.

Big debts when asset prices are falling is bad arithmetic.


http://news.bbc.co.uk/1/hi/business/4480897.stm