Mark Carney has again come out to warn Canadians about an impending rise of interest rates less than a week after Finance Minister Jim Flaherty announced new mortgage rules on January 17, 2010 and the Bank of Canada announced that it would leave its benchmark overnight rate unchanged at 1% on January 18, 2011.

In an interview on CTV’s Question Period on Sunday January 23, 2011 regarding Canadian household debt levels, Carney said, “Canadians could overextend themselves and they could get into a position where the debts that are sustainable at very low interest rates prove unsustainable when rates return to a more normal level.”

He went on to say, “Don’t take the current situation and extrapolate it, extend it out to the future. At some point, interest rates are going to move higher, they’re going to go back to more normal levels. Can you service the debts you’re taking on today at that point?”

In what can be viewed as one of his most direct, and stern warnings of impending Canadian interest rate hikes, Carney has basically set the tone of what’s to come for Canadian borrows in 2011.

So where does that leave the Canadian interest rate outlook for 2011?

TD Bank Economist Francis Fong released a statement saying, “We anticipate the Overnight Rate to rise to 2.00% by year-end and 3.00% by the end of 2012,” from the current level of 1.00%.

So that would mean a 1.0% interest rate rise by the end of 2011 and a 2.0% rise by the end of 2012.

But when in 2011 will rates start to increase?

Pascal Gauthier, Senior Economist TD Economics wrote a January 18, 2011 commentary (about the January 17th BOC rate decision to leave its overnight interest rate unchanged) in which he stated “In the wake of this announcement, we maintain our call that the BOC is more likely to wait until July to raise the overnight rate.”

So will Canadian interest rates be raised at the BOC July 19, 2011 announcement date?

Michael Gregory, CFA Senior Economist at BMO wrote, “We’ve penciled in a May 31 resumption of rate hikes, but an earlier move can’t be ruled out. In any event, we look for the Bank to raise rates to 2% by year-end (symbolically the same as its inflation target), with sharp eyes on the loonie.”

According to Bloomberg news, Charles St-Arnaud, an economist and foreign exchange strategist in New York stated, “The benchmark rate won’t rise until May and will reach 2 percent by the end of the year.”

So whether Canadian interest rates increase on the May 31, 2011 or the July 19, 2011 BOC announcement dates, what is clear is that Mark Carney is warning Canadians that they will go up sometime in 2011.

With the impending Canadian Mortgage rate changes coming into effect on March 18, 2011 and April 18, 2011, the potential for an added interest rate increase will undoubtedly factor into consumers upcoming mortgage decisions.

The rule of thumb for some Canadians now appears to be, the longer you wait in 2011, the harder it maybe to get the mortgage you want at the interest rate you need.

The month of October 2010 saw overall Canadian building permits decrease by 6.5% from September figures as municipalities across Canada issued $6.2 billion in new building permits. This October value was comparable to levels prior to the economic downturn.

Permits fell more than expected as economists predicted a 4% decline according to a Bloomberg News Survey.

“Current levels of building permits remain in line with levels experienced prior to the downturn. Nevertheless, we expect that the Canadian housing market is entering a softer environment. Recent data releases reaffirm this view,” said Scotia Capital economist Derek Holt.

Canadian residential construction intentions decreased by 11.2% with $3.4 billion for permits in October compared to $3.8 billion in September. Stats Canada indicated that declines in single and multi-family permits issued in Ontario and Quebec accounted for most of this decline.

Total Canadian non-residential construction intentions remained relatively unchanged and rose by a modest 0.1% to $2.744 billion for permits in October compared to $2.741 billion in September. This was also a 3.1% increase over a year ago when there were $2.663 billion in permits for October 2009. Declines in the value of Institutional projects were offset by higher commercial and industrial intentions.

The total value of building permits in October 2010 increased by 7.7% in British Columbia, 21.8% in Manitoba, 135.8% in Newfoundland and Labrador, 50.5% in Nova Scotia and 52.4% over September figures.

In their latest report issued on December 6, 2010, Statistics Canada stated:

The value of building permits was down in five provinces in October.

The largest declines were in Ontario and Quebec. Both provinces experienced large decreases in both the residential and non-residential sectors. New Brunswick, Alberta and Prince Edward Island also registered declines.

In contrast, Newfoundland and Labrador, British Columbia and Saskatchewan posted the largest gains. In Newfoundland and Labrador, the value of all permit types was up, led by institutional building permits. In British Columbia, the increase was mainly due to multi-family and non-residential permits. In Saskatchewan, the increase was widespread except for permits for multi-family dwellings.

In the residential sector, Prince Edward Island lead the nation on a monthly percentage increase basis in October 2010 with a 24.2% increase in residential construction intentions followed by 15.9% for Manitoba, 14.9% for Saskatchewan, 5.6% for British Columbia, 4.9% for Nova Scotia and 4.3% for Newfoundland and Labrador.

The value of building permits for single-family dwellings increased by 9.5% in September to $2.2 billion, following five months of declines. This increase was due to higher construction intentions in seven provinces, led by Ontario.

Intentions for multi-family dwellings rose 6.7% to $1.6 billion, the second monthly increase in a row. British Columbia recorded the largest increase among the six provinces that reported a gain. Construction intentions for multi-family dwellings declined in Quebec, Alberta, Manitoba and Newfoundland and Labrador.

Nationally, municipalities approved 17,510 new dwellings in September, up 4.0% from August. The increase came mostly from single-family dwellings, which rose 9.2% to 7,178 units. The number of multiple-family dwellings edged up 0.6% to 10,332 units.

The non-residential sector saw Newfoundland and Labrador record the highest percentage increase in the value of building permits in October 2010 473.7% with $128.4 million, up from $22.4 million in September. Nova Scotia registered a gain of 148.7% with $88.8 million in permits. Saskatchewan had an increase of 105.6% with $127.3 million in permits and Manitoba registered a gain of 33.7% with $61.1 million in permits.

British Columbia saw a 12.5% increase in non-residential building permit intentions with $370.3 million which also represented the highest dollar volume in October 2010, up from $$329.2 million in September.

The value of commercial building permits totalled $1.7 billion in October, up 8.8% from September. This was the highest level since May 2008, following a substantial 38.4% increase in September 2010. Higher onstruction intentions for a wide variety of buildings, including laboratories, warehouses and retail stores, offset lower demand for office building permits in Ontario and Quebec.

Following four months of declines, industrial construction intentions rose 12.2% to $408 million. The increase was mainly attributable to manufacturing plants in Ontario and primary sector buildings in Quebec. Construction intentions for industrial buildings were up in eight provinces.

The value of institutional building permits fell 20.4% to $685 million, following a 23.7% increase in September. The decline was due primarily to construction intentions for educational institutions, medical facilities and religious buildings in Ontario.

With the recent announcement that the Bank of Canada has raised Canadian central bank interest rates by .25% on June 1, 2010, attention has turned to what this means for the future of short term interest rates in Canada for the balance of 2010 and beyond.

This is the first time that the Mark Carney at age 45, the youngest central banker of all the G8 economies has raised Canadian interest rates since he took the reins of the Central Bank of Canada in February 2008 when one of the most overwhelming worldwide recessions since the “Great Depression” was bearing down on Canada.

However, it appears that the .25% June 1, 2010 rate increase had more to do with reestablishing the normal structural functioning of the Canadian Banking system than anything else.

This was evidenced by the June 1, 2010 Bank of Canada news release entitled; “Re-Establishment of the Standard Operating Framework for the Implementation of Monetary Policy,” which stated:

Ottawa, Ontario – As part of the Bank of Canada’s interest rate decision on 1 June 2010, the Bank will re-establish the standard operating framework for the implementation of monetary policy.

The key features of this framework are the target for the overnight rate, the operating band, and settlement-balance management. Effective immediately, the target for the overnight rate will be the midpoint of the operating band and the width of the operating band will revert to 50 basis points.

The Bank will conduct Special Purchase and Resale Agreement (SPRA) and Sale and Repurchase Agreement (SRA) operations as necessary to reinforce the target for the overnight rate (see Terms and Conditions). The targeted level of settlement balances will be gradually reduced to the typical level of $25 million according to the following schedule:

• 2 June 2010 – targeted settlement balances will be lowered from $3 billion to $1 billion;
• 9 June 2010 – targeted settlement balances will be further lowered from $1 billion to $200 million; and
• 16 June 2010 – targeted settlement balances will be lowered from $200 million to $25 million.

The Overnight Standing Purchase and Resale Agreement (PRA) Facility, under which Primary Dealers have access to an overnight standing PRA facility at the Bank rate, will be made a permanent part of the standard operating framework. Terms and Conditions can be found at http://www.bankofcanada.ca/en/fixed-dates/2009/rate_210409_2.pdf. This facility was introduced in April 2009 as part of the framework for implementing monetary policy at the effective lower bound for the overnight rate.

The fact that Statistics Canada released figures showing that the Canadian Economy expanded by 6.1% in the first quarter of 2010 only accelerated expectations that the Bank of Canada would increase Canadian interest rates. This was widely publicized, but what was not widely publicized was the fact that the change in year-over-year growth for the first quarter of 2009 to 2010 was only 2.2%.

This was hardly a sign that Canada’s economy was firing on all cylinders. In fact, you also have to take into consideration Statistics Canada figures that showed that Canada’s economy actually contracted by 7.0% in the first quarter of 2009, so the first quarter 2010 figures didn’t even fully offset those losses.

Domestic demand was the biggest driver of Canada’s economic recovery over the past 6 months and a substantial portion of that directly resulted from Canada’s healthy real estate market. However, real estate sales in the first quarter of 2010 can only be viewed as a lagging market indicator. Mark Carney and the Bank of Canada already had figures beyond the first quarter of 2010.

Therefore when the Bank of Canada released their statement with the June 1, 2010 .25% rate increase, it offered no economic rational for the rate increase, only technical and structural “normalization” for the Canadian Banking system.

In fact, the statement was tempered and subdued, painting a picture of economic uncertainty. It stated that “the required rebalancing of global growth has not yet materialized” indicating that any further Canadian interest rate hikes would have to be weighed against both domestic and global economic developments.

In a recent interview, Mark Carney stated, “One of the biggest determinants of growth in Canada is U.S. economic activity,” with “The level of U.S. industrial production, the levels of U.S. demand for housing, cars and other products that Canada feeds into.” He went on to say that “Obviously, given the scale of adjustment of the consumer balance sheets, given the scale of the fiscal adjustment in the United States. U.S. activity, consumption if you will, is going to be lower, it’s not going to go down, but it’s going to be lower, it’s going to grow less rapidly going forward”.

A June 7, 2010 Bloomberg BusinessWeek article raises further concerns of possible negative impacts on Canada because of recent global economic developments.

Canadian policy makers emerged from meetings of Group of 20 officials last weekend warning the impact of Europe’s debt crisis on Canada may escalate.

Bank of Canada Governor Mark Carney said that while the country has so far been only been modestly affected, there are “scenarios” where things may get worse as European governments rein in deficits. Finance Minister Jim Flaherty said Canada isn’t an “island.”

“We’ve had a series of events that are prompting a series of fiscal tightening,” Carney told reporters in Busan, South Korea, where the meeting was held. “If everybody does that and everybody does that at the same time, it will slow the pace of global growth and you need other sources of demand to crowd in on that.”

With these recent remarks by both Mark Carney and Jim Flaherty, there is little doubt that Canadian Interest rates will have to hold steady for the balance of 2010 and NOT go up.

With only “Domestic Demand” primarily being responsible for the current economic growth in Canada, it would make no sense to increase rates any further until there is a recognizable and durable economic recovery trend in the United States, our largest trading partner. Doing so would only hider and possibly reverse the current economic trend.

Numbers are coming in today from China’s housing minister, Jiang Weixin, that the country’s residential real estate industry has risen 16.1% to 3.6 trillion yuan ($527 US) between January 1 – December 31, 2009.

Bloomberg’s Business Week has a quick snippet of this news bit on their website. Their article, written by Huang Zhe of Beijing, illustrates the continued climb that 2010 will see in new homes being built from the ground up.

Sales increased 42.1 percent to 930 million square meters, the ministry said. The government will build 2.8 million housing units this year, ensuring that the country’s low-income earners can afford accommodation, the ministry said.

Angence France-Presse (AFP) released an article for immediate press distribution today in which they relay this message by stating 2009’s soaring housing prices in China “will rise further in 2010 and beyond as the nation develops and as local officials push property sales as a revenue source.”

The AFP attributes this belief to the Chinese housing ministry, just as Bloomberg and various other news outlets have done today.

The bullish assessment by Minister Jiang Weixin appeared to cast doubt on government pledges to curb runaway prices that have fuelled fears of a real estate bubble and concerns that they were rising out of reach of many Chinese.

Minister Weixin stated his prediction in that there will be an “upward pressure on housing prices,” which will “remain great for the next 20 years because demand will be huge due to rapid urbanization and industrialization and because our land is limited.”

Huge pricing pressures will be inevitable in the Chinese real estate market; however, this hurdle is one that Premier Wen Jiabao is trying to dim the lights on by saying that Beijing would condemn those who practice any illegal avenues that would drive up prices, as Premier Jiabao wants to ensure a “steady and sound development of the real estate market” in China.

Ultimately, Premier Jiabao wants to satisfy the people’s basic needs in China when it comes to housing. He plans to do so by curbing out the “precipitous rise of housing prices in some cities.”

Many are wondering though as to how China will be able to keep up with real estate growth when massive bank lending was of the norm for 2009, which fed into spending sprees by the Chinese Government. In fact, Kris Cyganiak of BuyRIC.com released an article today, China – Massive Government Stimulus Equals Empty Cities, which highlights the over expenditure nature that the Chinese Government has recklessly overtaken, resulting in empty cities and buildings in the commercial and industrial sectors of real estate.

So it would be advisable to take the “good news” released by the Chinese Government today with a grain of salt. The AFP is skeptical as well.

China’s far-flung provincial, city and county level governments have a patchy record on following through with initiatives handed down by Beijing due to pressure to maintain economic growth in their areas.

Beijing has been trying to cool the property sector by restricting lending, requiring buyers of second homes to put up a down payment of at least 40 percent and hiking interest rates on mortgage loans.

Trusting your government is usually perceived to be of rightfulness, but how can it be so right when your own government is not even providing their own rightfulness when it comes to truthfulness before their own citizens? The Chinese Government has a lot of housekeeping to do, both behind-the-scenes where corruptive messages are released to the public, and in the public spectrum where the numbers do not lie no matter what “figures” are released to the public.

The substantial effects of the “Sub Prime Mortgage Crisis” and the following “Global Financial Crisis of 2008” were devastating to the US real estate market.

After a period of spectacular rise from 1997 to 2006, the US housing market arguably topped out in early 2007.

This US real estate market boom was propelled by many factors, not the least of which was the goal of several presidents to increase home ownership. The list of failures is long and drawn out, but at its core includes the failure of government through the lack of the financial industry control.

Deregulation in the US financial services sector basically gave the industry the perceived mandate of self-control. Wall Street and the banking industry took convergent routes to create exotic financial vehicles to propel both stock values and sales of what became to be known as sub prime mortgages.

This significantly expanded the mortgage supply to the US consumer and created the largest property boom in US history.

If we look at this in a graphical perspective, you will see a direct correlation between the huge spike in US sub prime lending in the 2004-2006 period from the chart above, to the US housing boom peaking In 2007 in the chart below.

Although some people did recognize a real estate bubble forming, others did not. Record numbers of individuals became “instantly wealthy” by refinancing their homes and taking out equity to finance their new found lifestyle or to leverage further property purchases.

Property speculation became so rampant that some people even quit their day jobs to “Flip that House, Condo or Property”.

The inflated property values not only created a property boom but also inflated the US stock market and supported an economic expansion of the whole US economy through credit growth and the subsequent rise in US consumer debt.

Although some people viewed this as an increase in US domestic production, others argued that this was just “empty wealth” and a disaster in the making.

Our December 1, 2009 article British Columbia: “The Best Place on Earth” for Real Estate provided details on what followed:

2008 brought the world to the brink of a global economic meltdown. The collapse of Lehman Brothers investment bank in New York on September 15, 2008 shocked the world with the biggest bankruptcy in history. The worldwide stock markets and worldwide real estate were immediately affected and negatively impacted.

Even entire countries were on the brink of financial collapse, most notably Iceland.

On October 3, 2008, the US government responded with the “Emergency Economic Stabilization Act of 2008” authorizing the US Secretary of the Treasury to spend up to $700 billion US dollars to prevent a total meltdown of the US financial system.

The global financial crisis led to a massive US Government bailout of faltering industries and institutions to prevent a severe economic depression. Significant fiscal stimulus efforts were enacted to offset the adverse effects of the crisis.

Well, now in early 2010 we have the benefit of hindsight and can look back and see the truth. The record rate of home price appreciation between 1998-2006 from the real estate bubble was not spread across the US in a uniform manner.

Some states such as California, Arizona, Nevada and Florida showed the highest price gains while other states such as Mississippi and Alabama only showed modest gains.

Unfortunately, the carnage in the job market that started in late 2007 because of the “Sub Prime Mortgage Crisis” was much more widespread and further accelerated as a result of the “Global Financial Crisis of 2008”. The job losses spread to other industries and became more broad based and structural.

The aftermath of these events was deemed as the “US Foreclosure Crisis.” Although it was initially believed to be only a regionally based problem, only effecting sub prime mortgage holders, the cascading effect of nationwide job losses eventually exasperated the problem, making it more pervasive and extensive.

The lingering effects of these foreclosures continue to haunt the US real estate market and any potential economic or housing recovery. Recent news has reinforced opinions that the worst is not over.

A February 23, 2010 Market Watch article states the magnitude of the problem:

More than 11.3 million homeowners — nearly one-fourth of all Americans with a mortgage — owe more on their loan than their home is now worth, according to a report released Tuesday by First American CoreLogic.

More than 10% of people with mortgages owe 25% more than their home is worth.

The number of underwater mortgages increased by about 620,000 from the third quarter, the firm said. Another 2.3 million mortgages had less than 5% equity in their home, which could be wiped out if home prices fall further.

According to First American CoreLogic, California led the US with 2.4 million underwater mortgages with negative equity at the end of 2009. This was closely followed by Florida with 2.2 million. Together these two states accounted for 41% of the total US mortgages underwater.

The trouble spots that led the nation in this grim stat include Nevada with a staggering 70% of all residential properties being underwater. Arizona came in with 51%, Florida was at 41%, Michigan at 39% and California at 35%. In these five states combined, an average of 42% of all their mortgages were underwater with negative equity. These states can be viewed as still being in “Crisis Mode.”

Nationwide, more than 11.3 million residential properties in the US were in a negative equity position at the end of 2009. This represented approximately 24% of all outstanding US residential mortgages.

A March 2, 2010 Bloomberg article illustrates a recent drop in US home prices:

A possible relapse in home prices that had Fed policy makers concerned late last year may now be coming to pass, underscoring forecasts by economists such as Jan Hatzius that an interest-rate increase is a long way off.

The CHART OF THE DAY graphs median home prices for existing and new houses. At $163,600 in January, the median cost of an existing single-family home was the lowest since May 2002, figures from the National Association of Realtors showed last week. For new houses, the $203,500 median price was at a six- year low, according to data from the Commerce Department.

“We are likely to see some downward pressure on home prices in 2010,” said Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York. Hastening the decline, he said, will be the June 30 expiration of a government tax credit for homebuyers and the lapse later this month of the Fed’s mortgage- debt purchase plan aimed at keeping a lid on borrowing costs

Hatzius is among economists anticipating the Fed will keep its benchmark interest rate near zero at least for the rest of the year.

The health of the US economy relies in large part on consumer spending. Various sources indicate that it represented between 70%-71% of the US economy. At some points in recent history, the US consumer was held in such high esteem that they were credited with making up one-fifth of the global economy with their purchases.

However, at the end of 2009 the US economy shrank by 2.4%. This represents the worst single year performance since 1946. Household purchases also dropped 0.6%, the biggest drop since 1974 according to US Government statistics.

The US consumer is under tremendous pressure from job loses, underwater mortgages and foreclosures. The job market is the key to the prosperity of a city, a region or a nation.

As a Canadian, the US is our biggest trading partner and customer. Although, I am not trying to paint a bleak picture for the US in 2010, it is very hard not to consider the facts.

Jobs are the final common denominator for real estate value growth or contraction.

A jobless recovery is a misleading notion for the housing sector.

President Barack Obama has been widely quoted as saying that job creation will be the “number one focus in 2010.” Speaking during his 2010 State of the Union address, Obama called on the US Congress to deliver a jobs bill to his desk.

If you look at real estate at its basic level, it is a very simple situation.

If a person looses their job at a factory in a small town, they have to look for another job. If they or their many coworkers can’t find jobs, most will have to put their houses up for sale and move. If too many houses come on the market at the same time, prices will decrease.

If a person doesn’t have a job or the means that allows them to pay for a mortgage and they cannot sell their home, they will loose the house – simple.

Jobs are the key.

A very sobering article from the Orange County Register on March 1, 2010, states that:

Despite some reports that suggest the housing crisis may be hitting bottom, foreclosures so far represent the “tip of the iceberg,” real estate analyst, investor and lender Bruce Norris says.

Norris told hundreds of investors attending a seminar he held in Costa Mesa this past weekend that numbers indicating the appearance of firming home prices and fewer foreclosure auctions are “illusions.”

Government repayment and loan modification programs make foreclosure numbers appear lower for now, but are delaying the inevitable inability or disinclination of homeowners in trouble to hang on to property that has dropped in value by hundreds of thousands of dollars, he says.

Meanwhile, he says, redefaults on loan modifications are “sabotaging” government efforts.

Mortgage delinquencies will continue, “skyrocketing,” he says, because:

“The resets of the Option-Arm loans will cause a larger number of foreclosures than the subprime loans.

“Resets are part of the problem, but a bigger concern is the owners who owe more on their home than it’s worth.

“Commercial loans and credit card losses will soon add to the problem.”

Unemployment is a significant factor. He says: “I think we will fall back into recession by the end of 2010, and the unemployment rate and underemployment rate will be about 20% in 2011.”

Owners are finding it more and more acceptable not to make their house payments. The mindset, according to Norris: ” ‘I see my next door neighbor has stopped making his payment, and he just bought a camper.’ You can see that coming. We haven’t really been through the biggest part of the problem.”

These above statements represent one person’s view of the situation. However, the facts do show that there is a growing backlog of owners that have simply stopped paying their mortgages because their homes are deeply in negative equity territory. Banks have been avoiding foreclosing on many of these properties because by taking possession they are then responsible for property taxes, maintenance and taking the (up to 50%) loss on some of these homes.

New US Government policies and measures may have to be put into play. Keeping the Fed rate at near zero may not be enough. It now appears that the US housing market is still going to go through further turmoil this year. The current trend of increasing foreclosures and decreasing prices does not bode well.

Recovery will eventually come to the US real estate market, but in early 2010, it looks to still be a ways off in the future.

An asset bubble is caused by investors bidding up the price of an item to unrealistic levels that do not reflect realistic market principles of return on investment or profit expectations.

A prime example of an asset bubble is the dot-com bubble of 1998 to 2000. Internet companies seemed to spring up overnight with over inflated values and unrealistic expectations. People poured money into the stocks of these dot-com companies, not because they were legitimate business opportunities, but because they perceived that the value of their stock would continue to rise indefinitely.

Irrational exuberance is a term that can best describe the motivation of people that put their money into a stock of a company that would deliver groceries door to door by FedEx or other dot-com ideas of that era. These companies operated at a loss to gain market share and growth. But that cannot go on indefinitely and it didn’t.

On March 10, 2000 the technology heavy NASDAQ market peaked at 5132.52. What followed was the spectacular failure of most of these startup companies and huge losses for their investors.

A real estate bubble is caused by a disconnect between the actual or real value of a property and the perceived value based on an overexcited market that bids up or inflates property values.

A collapse of a real estate bubble in Japan set off a recession in the 1990’s. It took Japan’s economy more than a decade to resume noticeable growth. It became aptly named as the “lost decade” in Japan.

According to a December 25, 2005 New York Times article:

JAPAN suffered one of the biggest property market collapses in modern history. At the market’s peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time.

Then came the crashes in both stocks and property, after the Japanese central bank moved too aggressively to raise interest rates. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging prices into a 14-year trough, from which they are only now starting to recover.

When the bubble burst (as all bubbles eventually do) the Japanese real estate market lost between 50% – 80% of its value, according to various sources.

As we all know, the US real estate market suffered a similar fate.

The US real estate bubble was inflated by a spectacular rise from 1997 to 2006, led by cheap credit and the momentum of large-scale market speculation. Prices reached unsustainable levels and the US housing bubble’s eventual collapse triggered the “Sub Prime Mortgage Crisis” and eventually the “Global Financial Crisis of 2008”.

Real estate markets across the US suffered by varying degrees but it can be said that California, Arizona, Nevada and Florida were some of the worst affected states.

In fact, a closer look at the state of California really shows the carnage that that state suffered from the collapse of the US housing bubble. The devastating impact shows regional losses as high as -74.55% in May 2009 from a highpoint back in August 2007.

In our current system, free market economies are always subject to cycles. Markets go through periods of economic expansion (growth) and contraction (recession) dictated by market forces with both internal and external factors.

The Global Financial Crisis of 2008 created what some are now calling “The Great Recession”. Every developed country in the world was affected to various degrees. Real estate markets plunged with the western banking system on the verge of collapse.

Every country rushed in emergency measures to prevent an economic depression. Massive government spending in the major developed countries ensued. But the world looked to the strength of Asia and in particular, China to reignite the global economy.

China responded with a massive stimulus package and cheap loans to maintain and promote economic growth. China could easily afford it with its huge $2.3 trillion dollar US foreign exchange reserves.

By late 2009 global real estate markets not only stabilized, but posted growth and recovery in some countries. Both the US and Canada posted strong fourth quarter existing home sales increases.

World economic activity moved back to positive territory and China appears to be leading the way forward.

Jacynthe Cote, chief executive officer of Rio Tinto Alcan, the worlds largest aluminum company recently made the following statement in a Jan 22, 2010 Bloomberg article regarding Chinese demand:

Cote, who declined to provide a specific forecast for 2010 demand, said it would be pushed higher by countries such as China increasing economic output.

“The drop has been fairly significant” in countries of the Organization for Economic Cooperation and Development, Cote said. “In China, there is no sign left of recession. They are already at full speed, back to their peak and growing.

So it appears that China’s stimulus package and economic policies had a very positive impact. However, was the Chinese stimulus too much of a good thing? Is the Chinese economy now overheating and rising too fast?

In recent news articles and media commentary, the ugly term “Bubble” is being used far too often to describe the current condition of the real estate market in China.

Both Japan and the US suffered huge negative market impacts with real estate bubbles? Will China suffer the same fate?

A story in Daily Finance on January 5, 2010 offers these comments:

Analysts in China are concerned that this tremendous rise in construction, lending and speculative buying — housing starts nationwide rose 194% in 2009 — is blowing a bubble that could burst in 2010, taking down everyone who jumped into the game in 2009: homeowners, banks, developers, stock markets, and local governments.

The central government is also concerned. In late December, China Premier Wen Jiabao made a widely publicized comment that “property prices have risen too quickly.” He vowed to impose new limits on speculative borrowing, such as raising the deposit requirements to purchase raw land to 50%.

With real estate prices rising by 57% in a matter of months in 2009, some Chinese districts definitely appear to be going down the same path as Japan and the US. The Chinese real estate market looks to be definitely trending in a “bubble” direction.

These rapid price increases are not sustainable and the Chinese real estate market will react negatively. The severity of the markets reaction will determine whether we call it a “Bursting Bubble” or a “Cooling Trend.”