The European housing market is still problematic

We might be tempted to overlook it, but the cause of the current economic and financial crisis is the collapse of the subprime mortgage market in the United States.
The collapse of Lehman Brothers was the most striking consequence of the unprecedented decline of this market. If the poor state of the housing market really caused this crisis, then one can be inclined to think that this market’s recovery is a prerequisite for further economic recovery. Thus, THE question is whether and to what extent the economy is recovering.

The development of housing prices
What can we tell about the development of home prices in the year 2010? Have they reached the lowest level and is recovery near or are the prices still declining?
In the United States, it seems the market is over the worst. The so-called ‘Case-Schiller Index’ for home prices hit rock bottom in the spring of 2009, after losing over 30% in three years.
At the same time the United Kingdom housing market is also recovering.

Can we say something about possible trends in the European Union by means of trends in the US? Yes, we can and it appears that, depending on the chosen period and the selected data, the European trends actually follow the American market. The European market is six months to two years slow, though. An example. Both in the US and the European Union, home prices have risen approximately 500% since the 1970’s. In the United States, the market reached its peak in 2006, whereas the EU hit its high in 2008. So far, the decline of home prices has been a lot bigger in the US than in the EU. Whether the fall in price in our part of the world has come to an end, thus remains to be seen.

Are housing prices still too high?
It is possible to formulate an assumption about the level of current home prices, based on a few ratios that may indicate people’s means to own a house under the current circumstances. These are general ratios that do not express peculiarities of different housing markets. An example is the ratio between price and income. In 2003, this ratio broke through the long-term average and culminated in the US in 2005 and in Europe in 2006.
In the United States, it reached 12% above the long-term average, and in the European Union 18%. Within the EU, the regional differences were large. In the Netherlands, Spain and Ireland it culminated at 40%.

Nowadays, in the US, this ratio has fallen below the long-term average. In most of the EU Member States, the ratio still fluctuates around or slightly above the average.
Another ratio is that of mortgage versus income, because interest rates affect the opportunity of buying a home. Looking at this ratio, the situation improves.
In most countries, this ratio is still below the long-term average. Off course, the question is how sensitive these countries are to fluctuations in the interest rates because of the mortgage system.

Again, the answers are promising. At an increase of 200 base points only the Netherlands and the UK would rise above the long-term average. Consequently, houses would become relatively expensive. Dutch (and English) home owners are therefore vulnerable for rising interest rates

Risks remain
The ratios mentioned above, but also ones like the price-rent ratio, portray an unfavourable picture of the home market in a number of European countries. The Netherlands belong to those ‘risk countries’. According to all these ratios, there is a chance that the prices have not yet fully adjusted. The Netherlands compare favorably to other countries. Together with Germany, the Netherlands are the only country that built less houses in 2003-2007 compared to the preceding period.
In countries such as Sweden, Spain and Ireland the production skyrocketed. These countries are now facing oversupply. In Germany, the lower production is a result of its shrinking population. And what about the Netherlands? In that country the declining production is rather due to complicated legal rules than to a decreasing population (except for regions such as Drenthe and Southern-Limburg). In other parts of the country there may still be a lot of hidden demand that can be an obstacle to further (necessary?) price adjustment

Sourche:
Deutsche Bank: Housing markets in OECD Countries. Risks remain in Europe. March 2010