Global Property: the Stimuls the Bubble and the Logical Outcome

For the last 1 to 3 years the news on property markets around the world has been constantly miserable. Now that there are some price rises being seen, people are becoming alarmist over whether or not bubbles are forming.

There is no need for it. A bubble is the logical outcome of the amount of stimulus being poured into housing markets, but bubbles don't need to burst. The world now watches to see how central banks are going to remove the stimulus, but everything we know suggests this will be a gradual process, so, the logical outcome of that is that the bubbles will gradually deflate.

The current price rises in markets where there are bubble fears, including Canada, China, Singapore, New Zealand and Australia, is fuelled by massive increases in demand, met in some cases by weak supply. Yes, this demand is fuelled by the stimulus, low interest rates and bargain properties, but if the stimulus is withdrawn gradually enough, then any potential fall in demand will be met by an increase in normal market demand from a recovering economy.

Take Canada for instance. The recent price rises has sparked fears over whether or not a bubble is forming. But in October home sales broke the record set in May 2007 by 2% at 45,817. The logical outcome of that is rising prices. Yes, the demand is mainly based on low interest rates, but interest rates are only ever going to be increased gradually as the economy recovers, and if it is done gradually enough there is no reason why we should see the kind of catastrophic drop in demand necessary to burst the bubble.

The same can be said of most growing property markets around the world. The massive 56.6 million dollar sale of a Hong Kong apartment caused bubble alarm fever, but that just shows that the stock markets are making people foolishly rich again. It is likely that the property in question was bought by a wealthy person to live in it, and not as an investment, so why should it become a bubble issue. He/she just really wanted that property.

So, maybe the bubbles won't burst if the central banks are careful, but only time will tell...

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