Global House Prices

In: Business and Management

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Global house prices
Downdraft
European house prices are finding it harder to defy gravity
Mar 31st 2012 | WASHINGTON, DC | from the print edition
FROM the late 1990s home prices across the rich world soared relentlessly upward, borne aloft on a gale of cheap capital. In 2006 some overvalued markets began crashing to earth. Until recently, however, the correction seemed remarkably contained. American and Irish home prices plunged, giving up all the gains of the previous decade, but others have fallen far less steeply. Some markets faltered and then stabilised. The latest update of The Economist's global house-price indicators hints that this period of post-crisis calm may be coming to an end.
Europe's gravity-defying act has been the most striking. Most of its largest housing markets—Germany is the big exception—boomed in the early 2000s and stumbled during the crisis. But fortunes have diverged since then. Irish prices plunged and continue to sink. House prices in most other markets are still well above “fair value”, which we define as the long-run average of two measures: the price-to-income ratio, a gauge of affordability, and the price-to-rents ratio, an analogue of the price-to-earnings ratio used to judge the equity value of listed firms. Spanish markets are still overvalued by a quarter on these measures, although prices are falling. In Belgium and France, prices are well above fair value and they continue to rise.

Such buoyancy can largely be attributed to a combination of low interest rates and a preponderance of variable-rate mortgages. But from the third quarter of 2011 to the fourth, as recession bit and bond markets wobbled, European house prices came under downward pressure. The pace of depreciation quickened around the periphery of the euro zone. Appreciation slowed in Germany and France. The euro area's downturn probably continued into the…...

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