Is the World Housing Market Headed for Collapse?

11/9/05

Economists continue to debate the existence, and severity of, a worldwide bubble in the housing market. The surge of real estate values in major metropolitan areas was recently downplayed by the Federal Reserve as a cause for concern. However, large declines in housing prices have historically led to recessions in most industrialized nations.

Ricky: Based on my own independent research, it is clear that a housing bubble has formed in several U.S. cities. You need only look at the disconnect between rents and property prices to understand the scale of the imbalance....

Ultramachine: I knew you were going to come out in favor of this crazy 'bubble theory'. I'm really sick and tired of people like you continuously ringing the alarm bell the second some market starts to take off. It's because of people like you that many investors are going to miss this great opportunity to buy real estate.

Ricky: I'm not sure this is a good time to buy real estate though, Ultramachine. If we adjust current property values for inflation, we find that prices are far beyond historical norms. In fact..

Ultramachine: Ha! That's exactly where you're wrong Ricky. If you look at current housing prices relative to historical norms, you're overlooking the effect of low interest rates and high demand for housing. Investors need to buy real estate right away. I'm projecting annual returns of 25% in the hottest markets, like Miami.

Ricky: Well, again, I think we need to caution investors that buying in areas that have experienced a tremendous increase in property values carries a significant amount of risk.

Ultramachine: That is total bull Ricky and you know it. The only reason you don't want people investing in real estate is because you plan to buy all the good properties first. I'm not going to let that happen.

Ricky: That's not what I'm saying at all. I just think we need to caution people with regards...

Ultramachine: Listen to me everyone. Buy real estate now. Buy all the real estate you can afford. These low prices are not going to last. If you don't start buying condos and flipping them, you're going to miss out and your friends will laugh at you because they are rich from real estate and you're not. Don't let people like Ricky tell you "investing in real estate is risky" or "your check bounced again Ultramachine". If the world was run by Ricky, we would have never landed on the moon.

Ricky: Ultramachine, I take exception to that statement. I'm completely in favor of investing in real estate, I just think investors need to know that there is real risk in buying investment property at these prices.

Ultramachine: Wrong again Ricky. Smart investors borrow all of the purchase price on real estate. Then, once the property has appreciated in value, the investors sells for a huge profit with no risk. That's called business.

Ricky: No that's called speculating and it can lead to financial ruin in the event of a market decline.

Ultramachine: This isn't over Ricky.