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Last Updated: Tuesday, 26 April, 2005, 22:34 GMT 23:34 UK
US house market boom set for bust?
Stephen Evans
By Stephen Evans
BBC North America business correspondent

New York City
The chances of making money from property are getting slimmer
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In financial crazes, there's usually a general frenzied belief that the old rules of economic gravity have been superseded - but are we about to (re)learn the hard way that prices that go up can come down with a bump?

Certainly, the anecdotes indicating there's a boom with at least an element of speculation are starting to echo those of the red-hot Nineties.

Official figures just out show that the housing market is as hot as ever: the sales of new homes rose by twelve per cent last month despite widespread gloom about oil prices and debt.

Stories abound of property in Florida being bought and sold within the same day to make a killing on the rising price, and the "how to" guides to trading real estate are selling as fast in the book shops as, well, as fast as a new condominium in Florida.

Golden opportunity

Just like in the Nineties, cheerleaders are urging buyers to believe that staying out of the market means foregoing easy money.

Home-price speculation is more entrenched on a national or international scale now than ever before
Robert Shiller
Professor of economics
Yale University

David Lereah, the chief economist of the National Association of Realtors, says in his new book, "Are You Missing the Real Estate Boom?" that investors should "experience substantial and satisfying wealth gains".

He calls the current boom a "once-in-every-other generation opportunity".

Sharp price rises

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.

No crystal ball

But there are some signs that the peak may have been reached: the seemingly relentless rise in applications for mortgages has shown signs of wavering recently.

Boston harbour
Liquid assets: many buy homes with an eye to make profits

Certainly, one of the best observers of markets believes that the rise in property prices has been driven by speculation.

Yale economist Robert Shiller wrote at the end of the 90s about the bust that was waiting to happen.

His book "Irrational Exuberance" was published in March 2000 as the market started to turn.

He's now up-dated it with a focus on the property market.

"There is no hope of explaining home prices solely in terms of population, building costs or interest rates. None of these can explain the 'rocket taking off' effect starting around 1998.

"So what did cause this real estate boom in so many parts of the world? My conclusion: home-price speculation is more entrenched on a national or international scale now than ever before," Mr Shiller observes.

None of which means that the market is about to turn or even crash tomorrow. Nobody - nobody - can predict market behaviour.

And a change in sentiment in the housing market may just mean stagnant prices as incomes rise.

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.


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