Not all housing markets are equal. The US papers are now full of stories of recovery but only after one of the biggest house price crashes in history. Meanwhile, there are some countries in Europe than have not seen any price falls at all. Austria, Belgium and Finland, for example, have seen steady price growth over the entire period of credit crunch and euro crisis.

The euro area overall has seen much more subdued housing market behaviour. Average house prices did not rise so high in the early noughties and have not fallen so much subsequently.

The price crash in the US seems to be commensurate with the extent of house price rises prior to the demise and has left median prices well below the eurozone and UK averages. The UK seems not to have overheated prior to the crash in the same way as the US but average house prices have now fallen to below the EU average, having been above in 2007. It is now inflation in both the eurozone and UK that is stripping out the value of housing rather than absolute price falls.

Uniform returns

In this respect, the US has gone through a different housing market cycle to the UK and Europe. The forced sales and repossessions have meant that prices have adjusted as the UK did in the early 1990s: rapidly and steeply. With the notable exceptions of Ireland, Spain and Greece, the European adjustment has been different. Low interest rates, higher than expected rates of employment and low levels of repossessions have meant that house prices have lacked the mechanisms of market oversupply to precipitate steep falls. Europe’s housing markets could be in for a long period of attrition.

A closer look at countries within Europe reveals a very direct relationship between the extent to which house prices grew prior to 2007/8 and the extent of price falls subsequently. By this measure, only Italy looks as if it should be in for further falls.

There has been a surprisingly uniform return to similar average house price levels across Europe in many countries. It would appear that localised differences, for example the differences between the Paris and London markets compared to the countries in which they sit, are coming to matter more than the differences between European countries. By European norms, Italy still looks possibly overvalued but other differences are largely explained by reference to economic performance.

Owner-occupier levels

The ratios of house prices to economic performance, measured by GDP per head of population, are remarkably consistent over the euro area, averaging just over five times GDP. Again, on this measure, Italy looks relatively overvalued, while subject to what happens to their economies going forward, the USA, Ireland and Greece look either as if they may have overcorrected or that the rest of Europe still has further downward correction to come to catch up with them. We think that the stronger European economies will continue to see real, rather than nominal house price erosion – perhaps for some time, as a result. Further economic woes in the weakest economies, that adversely impact on GDP per capita, could trigger further associated price falls.

Taken from
Residential Property Focus Q3 2012