Due to deflation shocks, global inflation has been low, which allowed major central banks to keep interest rates very low, in turn fueling property. Xie estimates the strength underlying the real-estate market may have exaggerated global economic growth by one percentage point in 2004 to 2005.

Unlike in previous property cycles, Xie said institutional property investors have been active in shifting capital between different cities, leading to the rare situation where prices gained in unison around the world.

Innovations in the global financial system have led to a rising correlation of property markets to each other and central bank-policies. It has essentially turned deflationary shocks of the past 10 years into a global property bubble.

Western consumers, who have supported their consumption binge through home-equity refinancing instead of wage gains, would have little choice but to rein in spending if home prices decline. As consumers retrench, corporate earnings will decline, sending the equity market lower.

By M. Sese
http://realestatepress.org