European house prices are falling amid a deteriorating economy. The European Commission expects GDP in the European Union to fall by 1.8% this year before a recovery of 0.5% next year. In the UK, the economy is expected to contract by 2.7% this year and 0.5% next year, according to the Item Club, an independent forecaster. Interest rates have been cut sharply, but so far that has not helped restart lending to consumers.
Until the credit crunch occurred in 2007, house prices had been rising in most European countries. This survey focuses on the two countries where houses prices have risen strongest: the UK and Spain. In these two countries, economic growth was to a large extent driven by growth in the housing market.
In the year to October 2009, average UK house prices were down 14.6%, according to the Nationwide Monthly index. In the fourth quarter of 2008, Spanish house prices fell by 2.8% on the year and by 2.3% on the quarter, according to the housing ministry. It was the first fall in more than a decade, but many believe that the actual drop has been farther than the official figures have stated.
UK boom fuels booms abroad
During the years prior to 2007, UK consumers felt richer, thanks to the increased value of their homes, and spent the money. They fuelled housing booms in other parts of Europe by buying up properties there. In Berlin, it is expected that many foreigners, who accounted for a third of all purchases in 2007, will have to put their foreign homes on the market owing to falling prices at home.
Germany is included in this survey for a different reason. The country stands out because house prices there remained stable even though many international investors had bet that prices would rise. Investors bought large portfolios in the hope of making money out of the country’s low rate of home ownership. Between 2004 and 2007, a total €45.3bn of German houses were traded. Last year, that total fell to €5.1bn, including the €3.4bn acquisition of housing company LEG by Goldman Sachs.
The fate of the three markets
What happens to these three housing markets is not only of concern to home-owners, but also to institutional investors that are exposed to the residential sector through the bond market. Last autumn, rating agency Fitch singled out these three markets as problem areas for residential mortgage-backed securities. Fitch expects more arrears and losses in the UK, Germany and Spain. Unsurprisingly, the highest risks are in the more recent transactions because they were concluded at the top of the market. This will hit bondholders, especially those who hold the junior traunches.
The only bright spot on the horizon is the opportunities for others that that lower house prices may present. In a recent note, property consultants Jones Lang LaSalle highlighted the attractiveness of UK residential, particularly for Asian investors, thanks to falling house prices and a falling pound.
The relative strength of the Singapore dollar means Singaporean investors are well placed to take advantage of the sharp price corrections in the market ahead of its predicted medium-term recovery.
“One particular high-net-worth family in Singapore that we are currently advising has already allocated just over £100m (€106m) to invest in London prime residential and commercial property over the next 72 months,” said Julian Sedgwick, director of residential investments at Jones Lang LaSalle, Singapore.
