Regaining faith in bricks and mortar
By Benjamin Fox
One of the abiding memories of the 2008 financial crash which plunged Europe – not to mention the western world – into the deepest economic depression since the 1930s was of a property bubble which burst spectacularly and brought many of the world’s largest banks to their knees.
In no continent were the effects of the real estate crash more evident than Europe. The banking sectors of Spain and Ireland fell apart when the property and construction markets which had propelled their economic prosperity collapsed.
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So the good news, particularly for those who fell into negative equity when their homes lost value, is that Europe's confidence in bricks and mortar is returning.
The IMF’s Global House Price index has increased for seven quarters in a row, while 33 of the 51 countries assessed in its index have recorded rises.
A report by the Global Property Guide published earlier in June, found that eight of the ten weakest housing markets they surveyed were in Europe. But overall the trend of rising prices is clear – of the countries surveyed nineteen EU countries had stronger performing housing markets, while seven saw weaker performances.
The largest single increase is in Estonia which has seen a 20 percent spike, more than four times the growth rates enjoyed by its Baltic neighbours in Latvia and Lithuania.
Faith in bricks and mortar is also returning in Ireland, which was ultimately driven to a Є78 billion bailout in 2010 following its housing bust. Ireland saw a 7.5 percent spike in property prices in 2013, after having halved in value since 2007.
Should we be worried? Are we seeing the normal process of recovery, or the start of another unsustainable boom.
On balance, probably not.
A recovering property market is usually a positive sign that people are regaining confidence in their economic prospects.
In any case, in the EU’s crisis countries, real estate is still losing its value, although there are signs that the market is bottoming out. Greek, which had the weakest house prices fell by another 7.1 percent in 2013. Spain’s dropped by 5 percent following a 13 percent plunge in 2012.
Just as intriguing, and consoling for pessimists, are the property slowdowns in France and Finland, traditionally wealthy countries now confronting the prospect of economic stagnation.
But the last thing that the European countries with the most long-standing obsession with home ownership need is another debt-fuelled real estate bubble.
Bank crisis and estate bubbles
The link between a housing crash and a general recession is clear. IMF research has found that of the nearly 50 major banking crises across the world in the past generation, more than two thirds of them were caused by boom-and-bust housing markets.
In some countries – Britain being one – the deep-rooted belief in the divine law of ever rising property prices always needs watching.
There are increasing concerns that the UK’s economic resurgence is being built on the back of a property boom focused on London and the South-East. Prices have risen by more than 7 percent since 2013 across the UK, but the effects have been only been marginal for most of the country.
The European Commission has warned the UK government, and several others, to take measures to cool down its housing market.
Its recommendations – that the UK should update its twenty-year-old council tax codes, or introduce property taxes to take a bit of the heat out of the market – are economically sensible but unpopular with those voters who have made a fortune as the value of their home has risen.
The question is what policy-makers need to do to prevent another boom and bust cycle.
Min Zhu, deputy managing director of the IMF, suggests that the main causal factor is when a housing boom is accompanied by a surge in credit. The larger the ratio between mortgage loans and salary, the bigger the risk.
Meanwhile, just as the EU, US and Asian governments have imposed much stricter capital requirements on their banks to prevent risky trading, so loans to value limits can do the same with real estate. In other words, keeping a lid on debt is the most effective way to prevent a crash.
Barring hot-spots such as London and Paris which were barely affected by the credit crunch, Europe’s housing markets are still in various phases of the recovery stage.
But while there is no immediate threat of another crash, politicians have no reason to be overly sanguine. The consequences of another property obsession gone bad are too grave to risk repeating what Zhu describes as “benign neglect”.