One of the strange things about bubbles is that people warn for years that they're going to burst, but when they finally do go pop everybody's taken by surprise.
Snack, crackle and pop!
That's the very nature of bubbles. People can see that things are getting out of hand quite early on, but the bubble just keeps blowing and blowing, and we keep inflating our expectations to match, until the new pricing level seems quite normal. And then comes the pin.
Nobody can predict accurately when the bubble will burst. For example, HousePriceCrash.co.uk, the housing market Cassandra's website of choice, was launched in October 2003 with urgent warnings of an imminent implosion. At the time, the average UK house price stood at £129,761, according to Nationwide. It now stands at £198,565. Yes, there was a brief dip in 2008, but the Bank of England quickly put a stop to that by slashing base rates to near zero. No-one at HousePriceCrash (or anywhere else) could have imagined that happening five years earlier.
As long as interest rates remain artificially suppressed, mayhem will probably be averted. But when they rise, watch out. Economic forecaster Fathom Consulting has warned that house prices could then plummet by almost half, as the "fragile arithmetic" supporting today's elevated prices unravels.
Prices have now surged to average 6.1 times earnings, a whisker away from the market's peak valuation of 6.4 times, which it hit directly before the financial crisis. It warns that house prices will need to plummet by up to 40% to come into line with the pre-2000 average of 3.5 times earnings.
Mind your heads
The warning signs are multiplying. The prime central London property market is grinding to a halt, with vendors forced to slash asking prices by up to 10%, according to Propcision. UK property transactions crashed 45% in April, latest figures from HM Revenue & Customs show. The main reason is the exodus of buy-to-let investors, scared away by the Chancellor's tax crackdown, which began 1 April with the new 3% stamp duty surcharge on purchases, and continues next April with cuts to higher rate tax relief on mortgage repayments.
Now Paul Smith, chief executive of estate agency chain Haart, is warning of "trouble in paradise" as buyers abandon the market due to sky-high prices. When even estate agents are predicting doom, you know that things are getting out of hand.
We're witnessing the end of property as an investment. Buy-to-let has been lucrative but is a bothersome way to grow your money. Property is expensive (see above), illiquid (it's hard to get your money in a hurry) troublesome (think maintenance, tenant troubles) and costly to buy and sell (stamp duty, conveyancing fees).
By contrast, you can buy and sell shares in seconds, with typical charges of just £10 a trade plus 0.5% stamp duty. You can drip-feed-in smaller sums and retrieve your money whenever you like. And unlike physical property, the roof won't leak, the electrics won't blow, and the tenants won't do a runner.
Of course the stock market may also crash, so you should never invest money you may need in the next five or 10 years, to give it time to recover. However, trading at around 15 times earnings the FTSE 100 is broadly in line with its average historical valuation, and it yields 4%.