The Housing Market Isn’t The Only Bubble Threatening Your Wealth

The UK economy is blowing bubbles once again. The biggest of all is the housing market bubble, or “superbubble”, as London estate agents now describe it. 

But it isn’t the only one.

houseHouse prices in the capital rose a mighty 18% in the year to February, according to government figures. Across the UK, prices rose 9.1% (although that falls to a more modest 5.8% once you strip out booming London and the South East).

By contrast, the average salary, including bonuses, rose just 1.9% over the same period.

This means UK house prices are rising more than four times faster than earnings. 

That isn’t sustainable.

Forever Blowing Bubbles

London is growing on an influx of money from foreign investors but, like so many of today’s bubbles, it has been underpinned by rock bottom interest rates.

I can’t see the bubble bursting while base rates remain stuck at today’s lows. Instead, it will keep growing and growing, until interest rates rise with a vengeance, or the Bank of England takes direct action to stop it.

The longer the bubble blows, the worse it will be when it finally goes pop. 

$19bn To A Dollar 

But this isn’t the only bubble out there. There’s another bubble, and this one also has a familiar ring to it.

The technology bubble is back.

Today’s tech bubble has similar characteristics to the dotcom boom that finally blew up in March 2000. Investors have been paying mind-boggling amounts for companies that only turn a tiny profit.

Facebook recently paid an almighty $19 billion for WhatsApp, which charges each of its customers just $1 a year.

But today’s bubble isn’t as crazy as the last one. Tech companies are slowly working out how to ‘monitise’ the internet, to use the jargon of the last tech boom.

If it bursts, the damage won’t be as bad.

stock exchangeNo ‘Bull Run’ Bubble

Bubbles keep blowing up everywhere these days. Emerging markets. Gold. Commodities. Bitcoin. Chinese property. Even investment grade Scotch whisky.

There is too much hot money flowing round the world, looking for a lucrative home. Much of it has ended up in prime London property. More is coming.

I don’t see the main stock market as a bubble right now, funnily enough, despite the bull run of the past five years.

The average FTSE 100 company, for example, currently trades at around 13.3 times earnings. That is cheaper than the figure said to represent fair value, which is 15 times earnings.

Share prices do seem set for a turbulent few months, given tensions in the Ukraine and the recent slide in company earnings.

I won’t lose sleep over that. It could throw up some tempting buying opportunities.

Right now, there are far bigger bubbles to worry about.

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Harvey doesn't own shares in any company mentioned in this article.