Homeowners in both the UK and the USA - spurred on by aggressive marketing and the lowest interest rates in 30 years - have been refinancing old, more expensive, mortgages and heavily borrowing against their "equity" - i.e., against the meteoric rise in the market prices of their abodes.
According to the Milken Institute in Los Angeles, asset bubbles tend to both enhance and cannibalize each other.
Profits from surging tradable securities are used to buy property and drive up its values. Borrowing against residential equity fuels overvaluations in fervid stock exchanges. When one bubble bursts - the other initially benefits from an influx of funds withdrawn in panic from the shriveling alternative.
Quantitatively, a considerably larger share of the nation's wealth is tied in real estate than in the capital markets.
Yet, the infamous wealth effect - an alleged fluctuation in the will to consume as a result of changing fortunes in the stock exchange - is equally inconspicuous in the realty markets. It seems that consumption is correlated with lifelong projected earnings rather than with the state of one's savings and investments.
This is not the only counter-intuitive finding. Asset inflation - no matter how vertiginous - rarely spills into consumer prices. The recent bubbles in Japan and the USA, for instance, coincided with a protracted period of disinflation. The bursting of bubbles does have a deflationary effect, though.
In a late 2002 survey of global house price movements, "The Economist" concluded that real estate inflation is a global phenomenon. Though Britain far outpaces the United States and Italy (65% rise since 1997), it falls behind Ireland (179%) and South Africa (195%). It is in league with Australia (with 113%) and Spain (132%).
The paper notes wryly: "Just as with equities in the late 1990s, property bulls are now coming up with bogus arguments for why rampant house-price inflation is sure to continue.
Demographic change ... Physical restrictions and tough planning laws ... Similar arguments were heard in Japan in the late 1980s and Germany in the early 1990s - and yet in recent years house prices in these two countries have been falling. British house prices also tumbled in the late 1980s".
They are bound to do so again. In the long run, the rise in house prices cannot exceed the increase in disposable income. The effects of the bursting of a property bubble are invariably more pernicious and prolonged than the outcomes of a bear market in stocks. Real estate is much more leveraged. Debt levels can well exceed home equity ("negative equity") in a downturn. Nowadays, loans are not eroded by high inflation. Adjustable rate mortgages - one third of the annual total in the USA - will make sure that the burden of real indebtedness mushrooms as interest rates rise.