Housing market threatens to hit eurozone growth

From the Financial Times today:

Housing market threatens to hit eurozone growth

By Ralph Atkins and Ivar Simensen in Frankfurt

Published: August 20 2007 03:00 | Last updated: August 20 2007 03:00

Eurozone house price growth is slowing and threatening to act as a brake on the region's economies.

Average house prices in the 13-country eurozone will rise by just 4.3 per cent this year - the slowest pace since the launch of the euro in 1999 - according to forecasts by Barclays Capital, the London-based finance house.

As elsewhere in the world, house prices have soared in many eurozone countries in recent years, driven higher by exceptionally low interest rates that have in turn boosted economic growth. But Spain and France are seeing a striking deceleration. In Ireland, annual growth is likely to grind to a near-standstill this year.

The latest data suggest that the European Central Bank may have underestimated the extent of the housing market slowdown, as well as its implications for future economic growth and interest rate decisions.

This month, the ECB noted that the rate at which house prices were increasing "remains at high levels on average in the euro area", in spite of "some moderation".

But Julian Callow, European economist at Barclays Capital, said higher ECB interest rates - which have risen from 2 per cent at the end of 2005 to 4 per cent - "have had a dramatic impact, just as beforehand cuts in interest rates had a dramatic [positive] impact". Spain and Ireland have proved especially sensitive to changes in borrowing costs, as in both countries variable rate mortgages are widespread.

Clear signs of cooling house markets would weaken the case for further interest rate rises. Mr Callow said the spill-over effects of recent financial market turmoil, which has driven up borrowing costs in Europe, meant that the eurozone housing market "could face further weakness".

But there is little sign of average eurozone house prices crashing and the region's economies are not seen as prone to the difficulties that have struck the US subprime mortgage market.

Barclays Capital's analysis fits with results of the ECB's bank lending survey, released this month, which showed demand for housing loans continuing to deteriorate. Although the weakening in net demand in the second quarter of the year was not as great as in the previous quarter, it remained "significantly negative", the ECB reported. A further deterioration was expected in the third quarter.

The forecasts mirrored anecdotal evidence pointing to a loss of investor enthusiasm for continental European residential property.

"Investments in German residential property portfolios will probably peak this year, after rising steadily from 2004. We expect prices to fall, but not by very much," said Thomas Beyerle, chief strategist at Degi, the property investment management subsidiary of Allianz.

The marked cooling of eurozone housing markets could feed through into slower economic growth through several channels. A decline in residential house building could hit economies such as Spain's, which have boomed on the back of strong construction activity. The number of eurozone construction jobs rose by 400,000 last year and accounted for about a fifth of total employment growth.

Fewer housing market transactions would depress demand for consumer durables - fewer people would be kitting out new homes - and the boost to consumer confidence felt when house prices are rising strongly would disappear.

Eurozone housing markets vary from region to region, and some places may continue to see significant growth. But the long-awaited recovery in Germany still appears some way off, according to the Barclays Capital forecasts. It expects house prices in Europe's largest economy to grow just 0.7 per cent this year, after 0.5 per cent in 2006.