Is a Home-Grown Housing Crisis Brewing… in Europe?

At the conference I’m attending near Paris, the participants have gathered from far and wide, including many Europeans – from Spain, Germany, France, Ireland and the U.K. And one of the main questions on everyone’s mind is… just how much will the U.S. housing recession and sub-prime mess impact the European economy and housing markets?

They should also be considering the possibility of a housing slump and credit crunch closer to home.

Europe has been enjoying very a welcomed resurgence in economic growth over the past few years, there’s no doubt. Industrial production is expanding nicely, exports are booming, and housing prices inflating. In fact, most European countries – particularly the U.K. and Spain – have enjoyed booming property markets -- similar to what was experienced in the U.S. – up until recently.

That’s really the nagging question on the minds of many European’s I spoke with over the weekend: are home values in Europe destined to begin a downward spiral similar to what America is experiencing now.

Housing “Affordability” is a Big Issue Here Too

According to several of the people I talked to, housing affordability is at or near record lows in both Spain and the U.K., not to mention other EU member states – with the exception of Germany where home prices have been rather flat for years. However, sharply rising home values in most EU countries and in the U.K.; combined with slowly growing wages have conspired to price many first-time European home buyers out of the market.

In Spain for instance, housing prices have inflated at an average rate of 15% per year since 2002. In France, home price appreciation has averaged nearly 14% annually over the same period. Many faster growing EU nations like Greece and Ireland have seen similar or even bigger increases in property values. By many accounts home prices in the U.K., especially in and around London have jumped even faster in recent years.

Will the Rising Euro Hamper EU Exports?

The Eurozone economy is performing well right now, with growth in 2007 expected to be near 3%, but economists here are worried about two things: spillover effects from slowing growth in the U.S., and slowing export growth due to the appreciating Euro.

The common Eurozone currency is trading at all time highs against the U.S. dollar and also on a trade-weighted basis. In the U.K., the pound has likewise been strong. One of the reasons is that both the EU and Bank of England have been raising interest rates in recent years. In fact, EU rates have doubled in the past two years alone, resulting in higher borrowing costs for both businesses and consumers.

Now comes the credit-crunch, and the worry that a perfect storm may be brewing, whereby market rates such as LIBOR remain elevated or move even higher. Since many business loans, mortgage loans, and other consumer debts are indexed to LIBOR; higher rates would almost certainly result in reduced business and consumer spending, even as central banks in Europe attempt to prop up the economy by injecting “liquidity.”

A Home Grown Credit Crunch Could Clip Housing

The news of Northern Rock Plc’s difficulty is particularly jarring to European investors.

The Eurozone has enjoyed big export growth thanks to fast growing markets in Eastern Europe and Asia; but the EU’s largest export market is still the U.K. If troubles at Northern Rock broaden to include other institutions there, it could trigger a crisis of confidence, sending interest rates spiraling even higher.

Then there’s housing. In Spain, the economy is expanding at a robust clip of 4% this year, while bank credit is growing more than 23% year over year; sounds good! But with so much speculation in real estate in recent years (sound familiar?), Spaniards are understandably worried about their home values.

According to a recent article in the Financial Times, a Madrid based economist estimates that half a million families in Spain will have difficulty paying their mortgages if euro interest rates rise much further.

This sounds eerily similar to the sub-prime/housing decline script being followed in America. Could Europeans soon be facing a home-grown housing crisis of their own?

Comments

[Sai Stocks n Shares]

Hi
Your blog is quite nice and informative.
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Now BEST Buy is INFOSYS for Trgt 2000-2100. RELCAPITAL for Trgt 1800, RNRL For Trgt 100-110 & APIL for trgt 1000

Regards.
Sai Stocks n Shares

[Estate Agents Finder]

After US now its trun of Europe to feel a hosing bubble brust , then it might follow in Asai too. China and India are on its peak of bubble and may brust anytime soon