European house prices to face UK-style slowdown

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European house prices to face slowdown

Reuters
March 4, 2005

LONDON (Reuters) - Strongly rising European house prices across most major markets are expected to slow over the next two to three years, possibly from the end of 2005, a review by the Royal Institution of Chartered Surveyors showed (RICS).

"The big period of capital gains in Europe is definitely over. I would expect it (the European housing market) would slow down and I saw signs of it slowing towards the end of 2005," Michael Ball, Professor of Urban and Property Economics at the University of Reading and author of the survey, told reporters.

Ball said the slowdown was expected to be most marked in those countries that had experienced the highest house price inflation such as France, Spain and Ireland.

The only western European country not to experience house price growth is Germany, but Ball said this could change.

Germany's house prices in real terms have remained constant since the 1970s. This may change as the German government's rhetoric has become more pro-housing, which he said could lead to a convergence in 10 to 15 years time with other housing markets, raising the country's owner occupation rate above its current 45 percent.

Julian Jessop, chief international economist with Capital Economics, said a house price correction in France and Spain could be a good thing.

"I think at the moment it's probably more important for the German engine of recovery to get going than for Spain and other countries to continue at full steam. At the moment you run the risk of having the worst of both worlds -- weak consumer spending in Germany because of the moribund housing market, and an asset price bubble in France and Spain," Jessop said.

"A better outcome would be a slowdown in overall house price inflation."

The only Western European market to experience a slowdown in 2004 was the UK where house price inflation fell to 11 percent from 15 percent in 2003.

"The UK market has led developments since the 1970s and its upswing and downturn trends tend to be followed by the rest of Europe in two to three years," Ball said.

He said low interest rates across the euro zone were the main driver at the moment and would help those markets to continue to grow quite significantly. But this could be upset by either a rise in interest rates towards the end of the year or by more new properties coming on stream.

Ball said one sign that the market in Spain may be slowing is that many domestic investors have pulled out of the buy-to-let market in the country's tourist areas over the last eighteen months, to be replaced by overseas investors.

"The highest risk to house prices is in tourist areas as this is where demand is discretionary. Domestic investors are pulling out of buy-to-let because the returns aren't there and they're worried about long-term decline."

Capital Economics's Jessop said developments in house prices are becoming increasingly important to overall economic performance as there is now a stronger correlation between house price inflation and consumer spending than between unemployment and consumer spending.


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