Jitters From Seville To Shanghai

Go to a dinner party or pop into a pub in Britain, and you'll almost certainly hear about the new national obsession: Property values. No wonder. Over the past five years the average house price in Britain has risen by 106%, to $289,000, with much steeper gains in the London area, according to Nationwide Building Society, one of the big mortgage lenders.

Doomsayers have been predicting a crash for years. But after a series of rate hikes from the Bank of England, most analysts figure that housing prices have stabilized. "The heady days of double-digit gains are over," says Fionnuala Earley, Nationwide's group economist. "But the fundamentals still bode well for a soft landing."

And the real-estate boom hasn't been confined to Britain. Since 1997, prices in countries including Spain, Ireland, and Australia have taken off. In China, authorities are trying to put a damper on investment in real estate, much of it speculative, which surged 27% in the first two months of this year. The dramatic gains have led to worries about a more dramatic collapse. "There is a danger that higher interest rates could trigger a much larger downward adjustment in house prices," the International Monetary Fund noted in its World Economic Outlook report.

Yet while nothing is guaranteed, many analysts think soft landings are a likelier scenario in most markets, with the possible exception of China. In many of the boom countries, the supply of housing has not yet caught up with demand, experts say, while interest rates are still historically low. "The risk of a bubble bursting has probably passed these [European] markets," says Simon Walley, head of economic affairs at the European Mortgage Federation in Brussels.

Still, some markets definitely need to cool off. Median home prices in Sydney have risen 250% since 1991. "Australia is a property-obsessed nation," says Louis Christopher, research director for consultancy Australian Property Monitors in Sydney. The Reserve Bank of Australia hiked interest rates last year, and another quarter-point hike, to 5.75%, is expected soon. That level may not seem astronomical, but experts worry that it could be more than some home buyers, who have borrowed up to the hilt, can withstand.

Spain, where housing prices have rocketed up 150% since 1997, also has analysts concerned. Ignacio Lopez de Hierro, a director at Metrovacesa, the country's largest real-estate firm, says that those making purchases for investment rather than residence acquired some 150,000 of the 600,000 housing units sold last year. These investors are already "withdrawing from the market in search of better returns," he says. Economists say a sharp rise in interest rates could hurt the financial sector and bring a halt to housing construction, one of the main engines of Spain's economy.

The real estate market in France is red-hot as well. Housing prices have jumped 16% during each of the past two years. "A lot of properties are overpriced already, but buyers can and will go further," says Gregory Lutun, manager of a Century 21 Real Estate agency in central Paris. Driving the trend are record-low rates and French housing prices that are still low enough to attract British buyers, who are snapping up properties in regions such as Languedoc-Roussillon. Unlike their counterparts in Spain, French authorities haven't issued dire warnings of a bubble. Most real estate experts are betting the price surge will taper off within three years as rates gradually rise.

The cracks appearing under Spain's housing foundations have yet to emerge in Ireland. Tax breaks, a young population, and an influx of returning Irish helped push prices up 12% in 2004. With interest rates at a 50-year low, even sticker shock is not enough to deter buyers from snapping up homes. The era of double-digit property inflation may be over, noted Bank of Ireland Group Chief Economist Dan McLaughlin in a recent report. But he added that "a sustained price decline remains a low probability." Robust income and employment growth would be enough to keep a dreaded crash at bay.

Such thinking seems to be the consensus. Let's hope the mainstream turns out to be right, not the Cassandras.

By Kerry Capell in London, with Carlta Vitzthum in Madrid, Rachel Tiplady in Paris, Brian Bremner in Hong Kong, and Assif Shameen in Singapore

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