Canada's Housing Bubble

MoneyWeek Suckers Rally Report

The shocking secret that could make you £46,000 wealthier in the next 12-24 months

This chart – unofficially called the ‘Affordability Index’ – was always viewed as the KEY indicator of the health of the UK property market. Everyone listened to it. From government ministers and City investors to financial journalists and property pros.

The Index measures how affordable property is by tracking the ratio between house prices and household incomes. The higher the multiple score, the less affordable property prices are. And vice versa.

• Any score below 4 – the long-term average of the index – is viewed as a strong ‘BUY’ signal. Put simply, that means property would be a very good investment.

• A score of 4 to 4.5 is still a BUY sign but it’s also the first warning that the market might be about to get overheated.

• Any score above 4.5 is a DANGER sign that property prices are moving out of kilter with people’s ability to pay.

As you can see from the chart, from late 1994 (1) to the summer of 2002 (2) the Affordability Index was below the 4 barrier, which signalled that property was a strong BUY.

People who bought on the strength of that signal, back in December 1994, would have seen a 249% return on their investment in 13 years.

But then in mid-2002 the Affordability Index burst through the crucial 4 barrier… and then skyrocketed to record highs.

That’s something the banks, the government, the estate agents and the rest of the property industry didn’t want you to see. Because by March 2006 it showed that houses were less affordable than they’d ever been before.

It was a clear warning that the property bubble had to burst.

Sure enough, that’s what happened.  Property prices started crashing in October 2007. And people who ignored the affordability warning saw the value of their investments slashed by 21% in just 16 months.

Now fast forward to today...

Property prices have gone up for six months straight... the property ‘cheerleaders’ are banging the drum that the crash is over... that it’s time to start snapping up ‘bargain’ houses and buy-to-let flats again.

The Express even splashed ‘House Price Slump is over’ all over its front page.

But before you listen to the industry hype and make your next move into property, how handy would it be to use the hidden Affordability data to get an accurate indication of the state of the market?

Very handy, we reckon.

Well know this...

One of MoneyWeek’s most trusted City contacts has just provided us with his own complete version of the Affordability Index that’s BANG UP TO DATE.

And the message it’s sending out is nothing like what you’re being told anywhere else.

I’ll explain the details in just a moment. But the fact is there’s no great property recovery. That’s a MYTH created by a series of dodgy data and a cartel of self-interested individuals.

In fact we’ve done the maths and we believe it could make all the difference between you making a killing on the next property boom... and LOSING £46,000 in the next 12 months.

I know that sounds dire.

But in the next 4 minutes I’ll give you all the proof you need that buying property in 2010 is a MUG’S game...

AND we’ll tell you about the 3 property investment ‘death traps’ to AVOID LIKE THE PLAGUE.

But it isn’t all bad news, not by any means.

You see, while uninformed and gullible investors get suckered back into the housing market, a new wave of ‘below the radar’ opportunities are going to open up that promise to make you EVEN BIGGER returns than property did during the last boom.

We’re going to reveal our 4 favourite investments in just a minute, including the shocking government secret that could make you a quick-fire 226%!

And really you won’t believe how simple it is to profit.

But first there’s something that just won’t wait…

INVESTMENT DEATH-TRAP 2010 #1:BUY PROPERTY NOW… and see £46,000 wiped off your assets by 2012!

Here is our updated version of the banks’ Affordability Index, revealed in public for the first time.

As you can see, the Affordability score is lower today (1) than when the property market crashed in Q3 2007 (2).

This means that houses are more affordable now than they were at the peak of the market (though you’ll see that the index is actually moving in the wrong direction again because of the recent house price rises). That was inevitable considering how far prices have fallen since 2007.

But just because the index is lower than it was 2 years ago doesn’t mean that it’s time to BUY. No way.

The litmus test is whether the housing market passes the affordability test. And here’s the thing… it doesn’t even come close.

No wonder the estate agents DON’T want you to see this

Look at the chart again.

Right now, according to our research, housing has an affordability multiple of 5.7. That’s still MILES above the crucial 4 ‘BUY’ barrier.

IN FACT it’s still far higher than it was at the height of the previous property boom back in 1989 (when the affordability multiple was 5.02) when house prices went on to crash by 37%.

Which means that…

Affordability levels are still worse than they were at the height of the last housing boom…BEFORE house prices plummeted!

That’s disastrous news for YOU… IF you buy property any time soon

So while the banks, the building societies, estate agents and their buddies in the press are looking out for themselves by telling everyone that the house price crash is over… our version of the Affordability Index, the key indicator of the health of the market, is screaming that prices HAVE to fall further if buyers are going to be tempted back into the market.

We think that’s a pretty compelling reason to stay out of the property market.

But, as you’re about to see, it’s by no means the only grim property news out there. In fact, we’ve collected a dossier of evidence SCREAMING that house prices are going to crash again.

Here’s the next vital piece of information you’re not being told about…

Why the property market ‘recovery’ is a lethal red herring

You might not have heard of the economist Jean-Paul Rodrigue. Many professional investors haven’t, though many readers of MoneyWeek will be familiar with his name.

But if the mainstream media really did their homework on the property markets, he’d already be a household name.

You see Rodrigue has made a startling discovery about the way all markets – including the UK property market – operate.

And that discovery is SCREAMING for you to steer clear of this property market ‘revival’ AT ALL COSTS.

Look at the chart below.

Rodrigue’s model ‘Mania Tracker’ (the red line on the chart) follows the pattern of market bubbles through four distinct phases… stealth, awareness, mania and blow off.

Now that might sound like something that only economics lecturers would get excited about… certainly not the man on the street.

But have a look at the green dotted line on the chart. This tracks the housing market during the last boom and bust, from 1982 to 1995.

As you can see, the property market followed the script closely. First house prices rose slowly, then they rocketed, slumped sharply, plateuaed and finally started falling again.

And this is the crucial bit. The current house price crash is following the exact same path. In fact, as you can see from the blue line on the chart, it’s almost a MIRROR IMAGE.

The parallels really are extraordinary…

• Between 1996 and 2000 we went through the ‘awareness’ phase – when smart investors spot that momentum is building behind the property market and start buying.

• From 2000 to 2007 we went through the ‘mania’ phase – when everyone and their dog notices that prices are going up and pile in for the ‘investment opportunity of a lifetime’.

• Between 2007 and 2009 we saw the first ‘blow off’ in the markets.

And now, according to the Rodrigue chart, we’re slap bang in the middle of the most dangerous phase of all… the ‘BULL TRAP’ phase.

This is where everything looks like it’s returning to normal… house prices are bouncing back, bullishness is back in fashion, the property pros are advising people to take advantage of these ‘bargain’ prices while they’re still available…

But in fact it’s not a signal to buy… it’s a property market TRAP that could have a disastrous impact on your financial future…

Right now we’re walking blindly into a trap that no one’s telling us about

Take a closer look at what happened at the same stage of the last house price crash, back in 1991…

In 1991 house prices went up in 6 separate months. The average house price was higher in December than it had been in January. Everyone in the media was convinced that the property crisis was over…

On 10 January 1991 The Times announced that ‘House price rises suggest a recovery’… on 6th March they said ‘the market has finally bottomed out’… on 13th March their headline screamed ‘House prices predicted to rise 66%’…

But people who bought into the property ‘revival’ ended up losing a FORTUNE…

Look at the facts…

As you can see, people who bought the average UK house in early 1991 saw the value of their assets slashed by 13% – in real terms – in the next 2 years… and by 19% over five years.

Sounds painful, doesn’t it? Well this time the consequences of buying back into the property market too soon could be even worse…

I’m talking about a negative equity nightmare that will pollute YOUR future for years…

The last time the property markets reached this stage, uninformed investors saw their assets slashed by 19%...

...in 2010 the penalty for ignoring this tell-tale DANGER sign could be even more severe

So how much further will house prices fall this time? And how long will the price crash last for?

Of course it’s impossible to say for sure. We haven’t got a crystal ball that allows us to predict exactly what will happen in the future.

But consider this…

• During the last house price crash in the 90s, the market didn’t bottom out until late 1995 when the ‘Affordability Score’ stood at just 3. For affordability levels to return to those levels this time around, house prices will have to fall by another 47%...

• For the Affordability Score to return to 4 – the long-term average of the Affordability Index – house prices will have to fall by another 30%...

• For the Affordability Score to pass below the crucial 4.5 barrier – when property is potentially a buy again – house prices will have to fall by another 21%...

We’re convinced that house prices are set to fall by another 20% AT LEAST…

Plunging uninformed investors into a negative equity NIGHTMARE that could last for years

Scary isn’t it? And that’s not all…

Here’s another shocking chart the property cheerleaders would rather you didn’t see. Since the 1960s, every housing bust has lasted the exact same time as the boom that preceded it.

The last property boom lasted 11 years... the property crash only began 2 years ago.

Which means you should stop listening to the estate agents, building societies and everyone else who’s screaming for you to get back into property RIGHT AWAY because…

It could be another NINE YEARS before house prices take off again!

Here’s exactly what you should do next…

In the circumstances, our advice is simple. If you’ve already got a home, you’re happy there and you’re comfortable with your mortgage debt, don’t do anything. Just enjoy your home – and if you’re on a tracker mortgage enjoy the record low interest rates.

But if you’re thinking about getting onto the ladder, or of upsizing, then I’d urge you to think again.

Just look at the figures…

The average price of all property in the UK is now £244,000. The price of the average detached house is £345,000.

If we’re right and property is set to come down by at least 20%, people who buy the average UK property now could see £46,000 wiped off their assets in the next 1 to 2 years.

And remember that’s an average figure for all property. If your house is worth £500,000, £750,000 or £1 million that figure could jump to £100,000, £150,000 and £200,000.

If you’re looking for property – and you don’t have to buy – we believe the solution is obvious.

Why not take advantage of the recent falls in rental prices. You’ll save money in the short term. You’ll free up the money you’d require for your 25% deposit. You’ll protect yourself from the spectre of negative equity.

And you’ll be perfectly placed to grab a bargain when house prices really do bottom out.

Best of all you’ll be able to invest in other, lucrative sectors that the smart money is piling into today.

You’ll find all the details of MoneyWeek’s Top 4 investments for 2010 – including one ingenious China play that’s all set to make early investors a FORTUNE – coming up.

But first let’s move on to the next investment to AVOID AT ALL COSTS.