Monday, October 30, 2006

Europe Faces Infection From U.S. Home-Price Fall

die studie auf die sich der autor bezieht kann hier in voller länge eingesehen werden

the full study from deutsche bank the writer is refering to can be viewed here in full lenghth

mehr/more on the "bubbel world tour"

Europe Faces Infection From U.S. Home-Price Fall

Oct. 30 (Bloomberg) -- In the last decade, real-estate prices in Europe have moved in one direction -- up. (not germany! / nur deutschland nicht)

That may be about to change. In the U.S., a booming property market has stalled. Plenty of people think it may be facing a full-scale crash. If that happens, it would be complacent to assume that Europe could avoid the fallout.

In the past 10 years, Spanish property values have more than doubled, while home prices have tripled in the U.K. and quadrupled in Ireland, ....

House-price growth across the region has moderated this year, according to real-estate advisers Knight Frank LLP. Residential-property values in France gained 9.4 percent last year, compared with 15 percent in 2004, while Irish prices rose 9.4 percent in 2005 versus 10.1 percent the previous year.

In both countries, Knight Frank predicts prices will increase 7.5 percent next year, very healthy when you consider the gains already made. The emerging economies of eastern Europe will experience the most dramatic growth, with Lithuanian values expected to expand 20 percent next year, while Latvia and Slovenia won't be far behind.

Even the perennially disappointing German market is expected to have modest price gains (2,5% 2007e) as it emerges from a prolonged economic decline

In the U.S., however, the outlook is a lot cloudier. (really an understatement!/untertreibung)

Impact on Europe
There is room for debate about the scale and duration of the decline. Yet nobody would dispute that the market is falling.

The issue is whether a slowdown in the U.S. will infect Europe. Not everyone thinks so. ....

Others aren't so sure. In a recent note, Deutsche Bank analysts Tobias Just and Stefanie Ebner said there was a serious risk of ``contagion'' between the two markets.

The U.S. has very different demographics from most of Europe. Yet there are four reasons to think that a decline in U.S. real estate will be bad news for Europe.

`Similar Growth Pattern'
First, history tells us that the two markets generally move together. ``Over the past 20 years, most housing markets on both sides of the Atlantic followed a similar growth pattern,.....

``Considering all these interdependencies, European markets might well be affected by the slowing U.S. housing market.'' Just as European and U.S. equity markets tend to follow the same cycle, it turns out property markets do as well. The relationship has held in the past -- and there is no reason why it shouldn't this time around.

Next, valuations are stretched in Europe just as they have been in the U.S. market. With the exception of Germany, house prices have been increasing much faster than wages at a time of slow European economic growth. In countries such as Spain and Ireland, house-price growth rates have been matching those of the U.S. market. Many people are getting priced out of the market -- eventually that will reduce home values.

Third, the European Central Bank may not have been raising borrowing costs as fast as the U.S. Federal Reserve, yet it has boosted its benchmark lending rate five times since December to 3.25 percent and shows few signs of stopping. The capital markets are global. As money gets more expensive it will restrict European home buyers as much as U.S. property purchasers.

U.S. Recession?
Finally, a U.S. housing decline could help cause a recession around the world. If that happens, it will hurt European real- estate prices. More broadly, a dip in the U.S. will damage confidence, and the property market is reliant on sentiment. If people think prices will drop, they almost certainly will.

In the medium term, house prices depend on how much money people can afford to borrow and whether they have employment. A drop in global economic growth and rising interest rates would make it impossible for European real-estate prices to continue their gains of the past few years.

With the U.S. market cooling, the times of unbridled price increases in the European home market will soon be over.


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