Economist says housing bubble will burst

[notiCIas]

Economist says housing bubble will burst

Princeton's Paul Krugman says the real estate market is heading for a tumble next year.

August 25, 2005: 2:29 PM EDT


CAMPOS DO JORDAO, Brazil (Reuters) - Soaring housing prices in the United States have created a real estate bubble that will likely burst early next year, Princeton University economist Paul Krugman said Thursday.

"I'll give you a forecast which might very well be wrong, but I think it will burst in the spring of next year," he said at a derivatives conference in Brazil's winter resort of Campos do Jordao.

"I would be surprised if it doesn't burst in the next three years," he added.

Krugman said skyrocketing U.S. housing prices were supported by large -- and somewhat "odd" -- capital inflows from emerging market countries, such as China, which has accumulated huge holdings of U.S. Treasury debt, helping keep long-term interest rates abnormally low.

"Americans pay for their houses with money they borrowed from the Chinese," he said.

In costly areas of California, like Orange and San Diego counties, the inventory of homes on the market is slightly larger than a year ago and analysts say prices are not rising as fast as they were in the past.

An expected decline in U.S. housing investment would be part of an economic adjustment process which could include the weakening of the dollar, higher U.S. exports and the reduction of current account deficits in the world's largest economy, Krugman said.

"This is how we would like to see it happening -- smoothly -- but there are many moving parts and they're unlikely to move at the same time," he said. "So it's not going to happen unpainfully."