Until recently, we have been living in a period of low global interest rates that have let consumers and companies borrow money cheaply.

That has driven demand for mortgages, let companies pay increasingly large sums for takeovers, and allowed consumers to spend freely.

And the results of this credit splurge are hard to ignore:

  • UK house prices have doubled in the past 10 years.
  • China's main stock index has quadrupled in value since the start of 2006.
  • The UK's FTSE 100 and US S&P 500 stock indexes are at levels not seen in almost seven years.
  • Commodity prices have been buoyed by strong global demand, pushing some such as copper to records.
  • Merger and acquisition activity has taken off, and private equity firms are now in control of some of the world's biggest brands.

But as the records have continued to tumble, concerns have kept on mounting.

Home improvements

In recent years consumers have benefited from the largesse of lenders, taking on larger mortgages and increasing personal borrowing to levels many now see as unsustainable.

On Tuesday, figures from the Council of Mortgage Lenders showed that first time buyers borrow an average of 3.33 times their incomes to buy a home. Other measures show they are using 18.7% of their incomes to meet mortgage repayments.

Pessimists also point to a wobble in the US housing market, where prices have started to soften and high levels of sub-prime lending to people with poor credit histories has fanned fears of a surge in mortgage defaults should interest rates rise.

At the same time, some very canny real estate operators have been selling up, signalling that, for them at least, the market could not get any richer.

London estate agency Foxtons was sold to private equity firm BC Partners for a reported £400m in May, and US property magnate Sam Zell has offloaded his main investment vehicle.

Flattening out

The view of the optimists on the housing and private equity markets is not so different.

  • It may become more expensive to get mortgages and do deals, but that is likely to slow rather than reverse the current trend.
  • Rather than the bursting of a bubble, expect a plateau of demand.
  • UK house price growth probably will slow, though a lack of new homes will help underpin the market especially in prime areas such as London.
  • Though real interest rates have risen, they are still low by historical standards.
  • Real estate bubbles may appear but they will be localised and dictated by special circumstances.
  • Mergers and acquisitions are unlikely to stop as there are compelling arguments for consolidation in many industries, such as banking.

The problem for investors and consumers watching events unfold over the next few months will be determining whether the commentators have got it right or wrong, and if it really is time to head for safety before things blow up in their faces.

Source: BBC