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Cracks Are Appearing in Europe's Property Market: Matthew Lynn
2007-05-02 02:41 (New York)
Commentary by Matthew Lynn
May 2 (Bloomberg) -- With a strong euro, a steadily
recovering economy, and no looming threat from inflation, you
might think that Europe's property market was largely immune from
the decline in U.S. home values.
Think again. Cracks are starting to appear in the real-
estate markets of Ireland, Spain and France -- the three euro-
area countries where property prices have soared in recent years.
That isn't about to blow over. The housing markets in these
countries may be on the verge of a sustained period of stagnation
-- and maybe even a full-blown collapse.
Why? House prices surged because interest rates were set too
low for those nations for several years in a row. Now they are
likely to be too high.
Europeans who thought investing in property was a sure bet
are being forced to reconsider.
``Last week's sell-off marked the first real sign of panic
among Spanish property investors,'' the London-based consulting
firm Capital Economics Ltd. said in a note to investors. ``A key
reason for this is that Spain's latest wobble has come against
the backdrop of the recent rapid deterioration in the U.S.
housing market as well as tentative signs that Irish house prices
have started to head south. This has prompted antiestéticars that a
similar situation could unravel in Spain.''
The Spanish stock market has been spooked by the threat of a
looming property slowdown. Last month, Spain's 10 largest
publicly traded real-estate stocks lost about 7 billion euros
($9.5 billion) in value in eight days as investors judged the
eight-year boom may be over.
Declining Profits
Parquesol Inmobiliaria & Proyectos SA slumped after it
reported declining profits as new properties failed to sell.
Overall, prices may advance only 3 percent to 5 percent this
year, according to Banco Bilbao Vizcaya Argentaria SA, compared
with 15 percent gains at the height of the boom.
Meanwhile, the Irish are having to get used to falling
prices. Irish home values dropped 3 percent in the first quarter,
according to the Web site http://www.MyHome.ie. They stagnated in
February for the first time in more than four years, mortgage
lender Irish Life & Permanent Plc said in April. That's after
Irish house prices quadrupled in the past decade, and as recently
as 2005 were rising by more than 9 percent annually, according to
Knight Frank LLP.
In France, housing starts dropped 15 percent in the three
months through February, the biggest decline in six years.
Apartment prices in Paris are rising at an annual rate of 10
percent -- but that is the slowest pace in seven years. That's
hardly a sign of a healthy property market.
Low Interest Rates
There's no great mystery about why France, Spain and Ireland
boomed. When all three countries adopted the euro, interest rates
were set by the European Central Bank in Frankfurt. It looked at
the entire euro-area economy -- not just property prices in one
or two countries. The result? Interest rates were lower than they
would have been if they were set by a national central bank.
And now? That has been thrown into reverse. Just as
borrowing costs were artificially low for those nations, now they
may be artificially high.
There are good reasons to think the boom in those countries
is coming to an end.
Since December 2005, the ECB has raised rates seven times to
the current 3.75 percent. They have almost doubled since the 2005
low of 2 percent. That's a hefty increase in mortgage payments.
Tightening Cycle
Interest rates are likely to go higher, perhaps to 4
percent. There is no sign that the current tightening cycle is
coming to an end, putting even more pressure on house prices.
A strengthening euro will make life tougher for exporters,
curbing wage growth in those countries. Again, that is going to
make it harder for people to take out big mortgages.
Interest rates are being set to keep a lid on Europe-wide
inflation. Even if the ECB lowered borrowing costs to keep the
property market afloat in Spain and Ireland, it would risk re-
igniting inflation in one of the other euro-area countries.
To put up rates when house prices, and new housing starts,
are moving into freefall may seem like madness. After all, a
significant property collapse could tip economies into recession,
and leave mortgage lenders and banks struggling. Yet that is the
way the system now works.
One consequence of the euro is boom-and-bust property
markets in some member economies. We have seen the boom. Now we
are about to see the bust -- and there is probably little that
anyone can do about it.
(Matthew Lynn is a Bloomberg News columnist. The opinions
expressed are his own.)
2007-05-02 02:41 (New York)
Commentary by Matthew Lynn
May 2 (Bloomberg) -- With a strong euro, a steadily
recovering economy, and no looming threat from inflation, you
might think that Europe's property market was largely immune from
the decline in U.S. home values.
Think again. Cracks are starting to appear in the real-
estate markets of Ireland, Spain and France -- the three euro-
area countries where property prices have soared in recent years.
That isn't about to blow over. The housing markets in these
countries may be on the verge of a sustained period of stagnation
-- and maybe even a full-blown collapse.
Why? House prices surged because interest rates were set too
low for those nations for several years in a row. Now they are
likely to be too high.
Europeans who thought investing in property was a sure bet
are being forced to reconsider.
``Last week's sell-off marked the first real sign of panic
among Spanish property investors,'' the London-based consulting
firm Capital Economics Ltd. said in a note to investors. ``A key
reason for this is that Spain's latest wobble has come against
the backdrop of the recent rapid deterioration in the U.S.
housing market as well as tentative signs that Irish house prices
have started to head south. This has prompted antiestéticars that a
similar situation could unravel in Spain.''
The Spanish stock market has been spooked by the threat of a
looming property slowdown. Last month, Spain's 10 largest
publicly traded real-estate stocks lost about 7 billion euros
($9.5 billion) in value in eight days as investors judged the
eight-year boom may be over.
Declining Profits
Parquesol Inmobiliaria & Proyectos SA slumped after it
reported declining profits as new properties failed to sell.
Overall, prices may advance only 3 percent to 5 percent this
year, according to Banco Bilbao Vizcaya Argentaria SA, compared
with 15 percent gains at the height of the boom.
Meanwhile, the Irish are having to get used to falling
prices. Irish home values dropped 3 percent in the first quarter,
according to the Web site http://www.MyHome.ie. They stagnated in
February for the first time in more than four years, mortgage
lender Irish Life & Permanent Plc said in April. That's after
Irish house prices quadrupled in the past decade, and as recently
as 2005 were rising by more than 9 percent annually, according to
Knight Frank LLP.
In France, housing starts dropped 15 percent in the three
months through February, the biggest decline in six years.
Apartment prices in Paris are rising at an annual rate of 10
percent -- but that is the slowest pace in seven years. That's
hardly a sign of a healthy property market.
Low Interest Rates
There's no great mystery about why France, Spain and Ireland
boomed. When all three countries adopted the euro, interest rates
were set by the European Central Bank in Frankfurt. It looked at
the entire euro-area economy -- not just property prices in one
or two countries. The result? Interest rates were lower than they
would have been if they were set by a national central bank.
And now? That has been thrown into reverse. Just as
borrowing costs were artificially low for those nations, now they
may be artificially high.
There are good reasons to think the boom in those countries
is coming to an end.
Since December 2005, the ECB has raised rates seven times to
the current 3.75 percent. They have almost doubled since the 2005
low of 2 percent. That's a hefty increase in mortgage payments.
Tightening Cycle
Interest rates are likely to go higher, perhaps to 4
percent. There is no sign that the current tightening cycle is
coming to an end, putting even more pressure on house prices.
A strengthening euro will make life tougher for exporters,
curbing wage growth in those countries. Again, that is going to
make it harder for people to take out big mortgages.
Interest rates are being set to keep a lid on Europe-wide
inflation. Even if the ECB lowered borrowing costs to keep the
property market afloat in Spain and Ireland, it would risk re-
igniting inflation in one of the other euro-area countries.
To put up rates when house prices, and new housing starts,
are moving into freefall may seem like madness. After all, a
significant property collapse could tip economies into recession,
and leave mortgage lenders and banks struggling. Yet that is the
way the system now works.
One consequence of the euro is boom-and-bust property
markets in some member economies. We have seen the boom. Now we
are about to see the bust -- and there is probably little that
anyone can do about it.
(Matthew Lynn is a Bloomberg News columnist. The opinions
expressed are his own.)
