Daily Management Review

European real estate prices come back to a reasonable level


06/01/2017


The period of the housing market bubbles in the euro area is over; the threat of a collapse remains only in two countries, says Deutsche Bank’s experts.



Andy Beecroft
Andy Beecroft
Residential property prices in most of the euro zone countries have returned to an economically justified level. So-called bubbles and the danger of collapse remain only in two relatively small markets. Also, rising prices look fearsome in three countries, including Germany. 

Jochen Möbert, expert of the Deutsche Bank Analytical Center in Frankfurt (DB Research), puts the ratio between real estate prices and the population’s level of income. A sharp deviation from the multi-year rate in the 11 largest euro-zone countries was observed in 2007-2008, the expert recalls, but now the "overprice", as he puts it, has been eliminated almost completely.

This is especially true in Spain, where the construction boom of the 2000s led to emergence of a bubble. Bursting, it plunged the country’s banking system into a severe crisis. In recent years, however, the Spanish residential real estate market has completely got rid of inflated prices. They fell from 2008 to 2013 by almost 40 percent, after which they rose somewhat.

Prices in Italy are now at an economically justified level. Here, housing has fallen in price by 20 percent from 2008 to the present day, which, the expert points out, abolished the previously observed "insignificant overprice".

In Ireland, the collapse during the recent crisis was about as powerful as in Spain, and the prices were grossly underestimated in 2013. Since then, they have grown by more than 30 percent, and now the ratio of "housing costs - income level" has returned to the multi-year average, says the specialist. The high rate of the Irish economic growth suggests that appreciation of housing will continue there.

In another former troubled country of the euro zone, Portugal, the current prices for residential property can be called profitable, says Jochen Möbert. Hey does not expect significant growth in the foreseeable future, citing relatively low economic dynamics, rather high level of population crediting, as well as demographic factors - aging of society and active emigration.

As for Greece, the expert finds its housing prices profitable and even understated. Since 2007, they have fallen significantly lower than the population’s incomes. As a result, the ratio between prices and incomes has now fallen below the multi-year average. At present, the market has reached the bottom and is stabilizing there, points out Jochen Möbert. In other words, he does not expect further price reductions, but also does not count on their significant growth - unless, of course, the Greek economy begins a strong recovery.

The author does not see a potential for a noticeable increase in prices in France, Finland and the Netherlands as housing in these countries is already very expensive. Compared with other major European real estate markets, Spanish and Italian, the French has least adgusted the overprice of recent years, emphasizes Jochen Möbert.

In his view, the further growth the already high prices in France will be hampered by the markedly increased level of consumer lending. In addition, only a slow increase in income is expected here in the coming years. All this will limit the effective demand for housing and, conversely, will increase the risk of lower prices.

As for the Netherlands and Finland, they, unlike France, are threatened not just by a decline, but by a "sharp correction" in property prices, warns the Deutsche Bank’s expert. The reason is the rapidly growing debt burden that the Finns have doubled since the introduction of the euro, and the Dutch, due to tax benefits, have reached an extraordinary 110 percent of GDP.

The most alarming situation, says Jochen Möbert, has developed in two relatively small countries - Austria and Belgium. Local housing prices have doubled since 2000, and, as a result, the gap between them and household incomes has reached record levels.

Two markets are displaying a clear overprice, so even a small increase in lending rates can cause a collapse in prices, the expert warns. Moreover, he even calls an event that could be a reason for a serious correction: the European Central Bank (ECB)'s curtailment of the program for the purchase of government bonds of the euro area countries, which, according to Deutsche Bank's forecast, will occur during 2018.

As for the euro zone’s largest real estate market, German, prices there can still be considered economically justified at the moment, states the expert. In the 2000s, housing in Germany did not rise in price, but became cheaper, and therefore a 50% price increase since 2009 led only to a normalization of the situation on the previously undervalued market, the expert is convinced.

However, in the coming years, the combination of several instantaneous factors - housing shortage, population growth due to labor migration and foreign capital inflows, which will partly go to buy real estate - will make the bubble in Germany’s housing market inevitable, the Deutsche Bank’s analyst warns. 

source: dw.de






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