Canada's Housing Bubble

May 06, 2010 Christopher Power businessweek.com

The deepest fears are about a China bubble where the central bank may not have all the policy tools it needs to stop a disaster

The International Monetary Fund took time out from rescuing Greece in late April to warn the world about asset bubbles -- those eruptions of speculative buying that hit economies from time to time and that usually end badly. The biggest bubble in recent times was the subprime-fueled housing boom in the U.S. Yet many economists think China could still win the bubble sweepstakes with its surge in property prices, huge trading imbalance, and record inflows of investment capital. The IMF also sees "hot money" -- flows of foreign capital that move in and out of markets with a few keystrokes -- threatening stability in currency rates, stock values, and real estate prices worldwide. One interesting trend: Many of the possible bubble economies have deep trade connections to China.

The bottom line: The deepest fears are about a China bubble where the central bank may not have all the policy tools it needs to stop a disaster.

Below is Bloomberg Businessweek's quick guide to possible bubbles in the making:

Canada

It weathered the crisis. Now housing has taken off -- and is generating an alarmingly high portion of GDP growth.

Brazil

Foreign capital is pouring in. Expected growth of 5.8% is brisk. Some analysts fear the government will overspend to influence the October election.

India

Two things to watch out for: Inflation is approaching 15%, and foreign investment in Indian stocks and bonds is at an all-time high of $92 billion.

Australia

A toss-up. The mining sector is white-hot and housing prices have jumped, but the central bank is hitting the brakes.

South Korea

A surprise bubble. Growth is approaching 5% and the central bank has kept rates too low, say analysts. Household debt is dangerously high.

China

GDP and property prices both increased more than 11% in the first quarter. The central bank keeps tightening, with little to show for it.

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