It’s only been five years since a massive housing bubble in the U.S. brought the global economy to a standstill, wiping out billions of dollars of growth and destroying millions of jobs worldwide. Since then recovery has been shaky at best. But now real estate experts are predicting housing prices worldwide to rise dramatically, creating what could be an even bigger problem- a global real estate bubble.
If a bubble of this scale should burst, it could have much larger implications than what we felt in 2008. If you’re looking to purchase a home right now, whether to live in or as an investment, here is what you need to know.
Real Estate Prices are Rising
With interest rates remaining at record lows across the world, investors are again flocking to real estate. Real estate markets in Europe, for example, are poised for up to a 10 per cent increase next year. The momentum is already building in the UK; in London, England, October real estate prices grew 10 per cent. Here in Canada the growth has been strong, but steadier. Since the 2008 financial meltdown home prices in Canada have gone up by 17 per cent.
Too Far Too Fast
Rapid increase in prices is one of the clues that a bubble is emerging. As we saw in the run up to the 2008 financial meltdown, real estate prices were rising so quickly that homeowners were buying with no money down with the understanding their home price would increase, creating big gains on their investment. In 2008, when the market could no longer sustain the rapid growth, the housing market came crashing down, causing millions to lose their homes. .
Housing Bubble In The Making
What is happening worldwide is the definition of a housing bubble: when home prices rise, dramatically fueled by demand and speculation. There comes a point, as it was in the U.S., when demand starts to decrease and because of the past speculation supply continues to increase. This mismatch eventually leads to a sharp drop in prices – and then the bubble bursts.
What Are The Consequences?
A sharp decrease in real estate prices worldwide, fueled by a housing bubble burst would be catastrophic to the global economy. Europe is already suffering with its increasingly serious debt problems and the U.S. recovery has not been as swift as experts said it would be. In October the U.S. government experienced a partial shutdown because of money problems and is again raising its debt ceiling in order to pay its month-to-month bills. Things are not back to normal.
The Impact For Canada
Since Canadian home prices did not slide in value as the U.S. market did, the rise in prices here, although dramatic has been steady. Stricter mortgage rules that have been tightened even more in the last three years have renewed confidence in the Canadian market as well. The belief is homeowners will be able to pay their mortgages for the long run and markets will survive if the global real estate market falters.
However, we won’t be consequence-free. Remember the U.S. is our biggest trading partner, and we’ve recently opened up trade to Europe in hopes of stimulating economic development here; we need these economies to stay strong. But Canada’s conservative attitude towards spending would be what saves it from what could be a second financial meltdown in six years.