European Real Estate: Set to Tumble?

A moderate slowdown is more likely, says S&P Ratings, though Spain's sizzling growth raises concerns

Demographic, financial, and structural factors are powering the current boom in the majority of Europe's real estate markets. Nevertheless, double-digit house-price inflation cannot be sustained indefinitely, and legitimate reasons exist to fear that the boom may turn into a crash. We at Standard & Poor's Ratings Services consider a moderate slowdown is more likely for these markets, however.

In the U.K., where the boom has been particularly long and strong, market indicators such as the ratio of second-hand properties to new-build prices were clearly pointing to some overheating in the second part of 2004. Yet the most recent set of price data consistently points to a soft landing on the market, to the extent that the Bank of England was able to cut its interest rate to 4.25% from 4.50% in August 2005.

Similar evidence of an orderly slowdown in house-price inflation can be found in most other markets. In France, real estate prices grew 9.5% year-on-year in the second quarter of 2005, compared with 16.3% a year before, according to the Federation Nationale de l'Immobilier.


  By contrast, Spain's real estate market raises concerns. The massive property boom of the past five years appears far from having run its course. At the end of 2005's second quarter, prices for new homes were up 17.2% year-on-year, while prices for existing properties were up 17.3%. Moreover, house prices have risen 140% since the market took off in 1997. In 2004, housing starts hit a record 700,000.

We would emphasize that demographic factors such as immigration played a critical role in the current housing market boom in Spain. Yet the Bank of Spain estimates that the market could be already overvalued by up to 20%. With unemployment still close to 10%, real estate markets are going to be increasingly exposed to a fall in consumer confidence, although the possibility of a sharp adjustment of house prices in Spain in the near term remains low.

Nevertheless, the danger is that the crash of a large European real estate market could also ripple through to other such markets in the region.

The above article is excerpted from a report issued Sept. 16, 2005, by Standard & Poor's Ratings Services

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