Worldwide property-buying
spree threatens to burst price
bubble
06-21-2005, 06h04
PARIS (AFP)
The worldwide appetite for
buying property, whether in
Paris, Los Angeles, or Bangkok,
is feeding a price bubble
that could burst, causing
havoc in national economies
and a financial meltdown for
heavily indebted homeowners.
Real estate purchases have
flourished with the ample
flow of money from lenders,
due to historic low interest
rates and a shying-away from
investing in the stock markets.
The level of interest rates
on mortgage loans has been
a veritable windfall for both
individual homebuyers and
property investors. Not only
can they borrow more since
mortgage payments are lighter,
banks have also extended the
time period for paying back
the loan.
Burned in the stock market
downturn a few years ago,
investors started to put their
cash into properties, sometimes
buying and re-selling housing
that had not yet been built
and pushing up property prices.
Also, for the past several
months, rising oil prices
have left the oil-producing
countries flush with cash,
a good part of which they
pour into real estate.
Some countries know what
it is like when a housing
bubble pops. Japan's economy
still shows scars from a housing
crash in the early 1990s.
Other are trying to curb
the enthusiam for property
investment. Britain has slowed
down the home-buying frenzy
of recent years with small
rises in interest rates.
British house prices rose
by just 5.7 percent in May
from April, the lowest level
in four years, according to
a survey from British lender
Halifax, well down from a
peak of 22.1 percent in July
2004.
Australia too has seen house
prices become more stable.
Elsewhere, such as the United
States, the housing boom shows
worrisome signs. In many European
and Asian countries also the
bubble is threatening to explode.
Fallout from a crash in the
property sector would be felt
throughout the economy.
It would choke off economic
growth fuelled by household
spending in the US and other
countries that have relied
on the housing boom.
If the value of houses and
apartments takes a tumble
while at the same time interest
rates rise, homeowners would
have a harder time paying
back their loans.
In the red-hot US housing
market, with home prices up
15.1 percent year-over-year
in April, there is growing
concern about new "creative
financing," such as adjustable
loans with a low initial interest
rate and interest-only loans.
These riskier loans have
caught the attention of the
US Federal Reserve, which
is worried about the implications
of a sudden rise in interest
rates or drop in prices that
could put housing into a downward
spiral.
Harvard University's Joint
Center for Housing Studies
found that nearly one in three
American households spends
more than 30 percent of income
on housing, and more than
one in eight spend upwards
of 50 percent.
Given the importance of the
US to growth in global demand,
a downturn in the American
housing market would have
ripple effects around the
globe.
AFP
