Real estate is not normally a top-of-mind issue to me, but when you hear the crazy stories about how house prices have gone up, up, up, you gotta wonder when the correction is going to occur.

From an April 27 Globe and Mail story:

A report released Tuesday by Re/Max Canada says Canadians have flocked to the housing market in every major city, preferring the security of housing to the vagaries of the stock market and mutual funds.

Since 1995, 3.6 million housing units have been sold in 16 urban centres across Canada, a 25-per-cent increase from the decade of 1985 to 1995, Re/Max reports.

The average price appreciation of homes across the country has been 53.7 per cent during the decade — more than 5 per cent a year.

The Star's take:

Home sales in Canada jumped 25 per cent over the past decade, with 3.6 million units changing hands between 1995 and 2004, according to a report released today by Re/Max Canada.

More Canadians bought into homeownership during the last 10 years than in any previous decade," Elton Ash, regional vice-president of Re/Max Western Canada, said in a statement.

Between 1985 and 1994, about 2.9 million existing homes were sold.

All of the activity during the past decade has the market ready for a slight cool-down, Scotiabank economist Adrienne Warren said in an interview.

"Our view is that the market this year, and also in 2006, will become a bit better balanced," she said. "Sales are cooling off a little bit because there's a little less pent-up demand after a couple of years of strong sales, particularly among first time buyers who drove a lot of the market over the last few years."

Prices will still rise, but at a slower pace, she said.

"I would say probably a five to six per cent increase this year — about half of what we saw last year — and then cooling off the following year."

What might explain this. The Globe again:

“It's the kind of investment Canadians like ... one you can have control over,” says Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada. “People are very uncomfortable or uneasy about RRSPs; for many their house has become their RRSP.”

But then the BBC opened a Tuesday story on the U.S. housing market with the following: Is the current property boom an unwelcome replay of the dot.com bubble of the late Nineties and destined to burst in the same way, showering a lot of people with a lot of pain?

Here's some more:

Twenty years ago in the United States, the price of a middle of the range home would have represented about five years of income for the house-holder.

Now, it's nearly eight years.

No crystal ball

But there are some signs that the peak may have been reached: the seemingly relentless rise in applications for mortgages has shown signs of wavering recently.

Certainly, one of the best observers of markets believes that the rise in property prices has been driven by speculation.

Yale economist Robert Shiller wrote at the end of the 90s about the bust that was waiting to happen.

His book Irrational Exuberance was published in March 2000 as the market started to turn.

He's now up-dated it with a focus on the property market.

"There is no hope of explaining home prices solely in terms of population, building costs or interest rates. None of these can explain the 'rocket taking off' effect starting around 1998.

"So what did cause this real estate boom in so many parts of the world? My conclusion: home-price speculation is more entrenched on a national or international scale now than ever before," Mr Shiller observes.

To my mind, Shiller's right: There has to be an element of irrational exuberance in this, fueled by the availability of cheap debt.

At some point, there's going to be a black magic moment where rising interest rates hit an economic slowdown. All of a sudden, those mortgages are going to be much tougher to keep up for a lot of people.

People may forget that Toronto's housing prices, as once example, crashed in the early 1990s and took a decade to recover.

These days, most working peoples' incomes go up by about the rate of inflation: About two to three per cent per year.

Yet housing prices have averaged six per cent increases, and in some neighborhoods in Toronto, year-over-year increases of 25 per cent have been recorded.

Those who don't think housing values can be volatile might be in for a rude shock one of these days.