European housing markets are showing clear signs of turning down, bringing downside risk to construction sectors in the region, says a report published by Standard & Poor’s. Titled “Europe’s Housing Markets Fall In Line As Central Banks’ Tightening Filters Through,” the report finds that housing indicators are easing back across Europe, the U.K. being the latest to signal retreating house price inflation.
“We believe house price inflation will remain at single-digit levels across the region in the near to medium term, provided central banks conclude their tightening cycle in the next three months, as we expect,” said Jean-Michel Six, Standard & Poor’s chief economist for Europe. “A further erosion of consumer confidence, however, could push Europe’s housing markets into negative territory and trigger a recession in the construction sector.”
As the report points out, evidence is building that U.K. house price inflation may be on the turn. Expectations for house prices fell to their lowest level since 2005 in July, according to the Royal Institution for Chartered Surveyors (RICS). New buyers’ enquiries have declined at the fastest rate since August 2004, RICS added, and the stock of unsold property on surveyors’ books increased to its highest level since January 2007.
These signals are hardly unexpected, especially after five rate hikes by the Bank of England. The surprise is how resilient the U.K. housing market has been in the past year and a half, despite record high levels of debt in the household sector.
“Looking forward, the U.K. picture is less certain,” said Six. “House price inflation remains high, and affordability is firmly stacked against first-time buyers. We see house price inflation retreating to 5% at the beginning of next year, and continuing at this level through 2008, further cumulative effects of recent rate hikes notwithstanding. Therefore, a period of consolidation rather than contraction is in prospect, mainly because of the benign fundamentals of the U.K. economy. Should this position change as the result of a global slowdown, however, the U.K. housing market and construction sector would be negatively affected.”
House price inflation is decelerating elsewhere in Europe, with attendant downside risk to these countries’ construction sectors and possibly their economies. In Ireland, for instance, house price inflation was a mere 1% year on year, and is expected to turn negative before the end of 2007. Furthermore, forward indicators suggest that the residential construction sector, which employs 12% of the labor force, has started to turn as well. And in Spain, house price inflation dropped to 5.8% in the 12 months to June 2007–the lowest rate since 2000. Recent data also suggest that the volume of housing starts has started to fall from the record levels reached in 2006.
In France, meanwhile, we expect flat, rather than negative, house price inflation. Fiscal incentives introduced by the new government, which become effective on Sept. 1, 2007, should have a limited effect on market activity. Although household debt in France has steadily increased as a percentage of disposable income, to 69.1% in March 2007 from 68.6% in December 2006, it remains at a reasonable level by European standards.
