Worldwide House Prices

New figures last week showed that US house prices were falling at record rates, and American consumers are losing confidence in their economy. The S&P/ Case-Shiller US National Home Price Index fell 3.2% last quarter compared with the same period in 2006.

#The worrying factor was that this data was collected before the recent sub-prime crisis really took hold, so it is expected that prices will only have fallen further in recent months, and the downward spiral looks set to continue for some time yet.

In the US sales slowed down and mortgage lenders tightened their lending criteria, so borrowers would find it more difficult to get a loan. With less buyers, sellers have been forced to cut their prices. Some lenders have been driven out of the market as the increasing number of delinquencies in the US have taken their toll. The two-year housing slump is likely to continue, say experts.

The US Consumer Confidence Index fell from 111.9 in July to 105.0 in August, with all main components of the index showing a decline. The Dow Jones industrial average fell last week in response to these figures.

At the same time house prices around Europe have begun to cool, even in previously overheated areas. It has an ominous echo of what happened at the start of the US sub-prime crisis about it.

Irish property prices have fallen for four months in a row as higher interest rates in the eurozone have started to have an impact.

In the Baltic meanwhile, the bubble may also have burst. The Riga region of Latvia has seen house prices fall by 3.5% in June, having previously gone down by 1% in May. Earlier in the year flats in the city had become more expensive than Berlin as speculators took a chance. Mortgages were taken out in Swiss francs, Euros and Japanese yen, which could result in major problems disastrous if Latvia’s currency was suddenly devalued – which may indeed happen as the country has a current account deficit of 26% of GDP.

Recent booms in Romania, Bulgaria and Croatia are looking vulnerable too. Danske Bank warned that much of Eastern Europe has seen a monster bubble that may burst like the one in Asia in 1997.

In Ireland house prices have fallen by 2.6% in the first half of 2007, with Dublin seeing a drop of 3.3%. As a result house building has slowed down and house registrations are down by 34%. Ireland has around 15% of its housing stock currently sitting empty.

Extreme levels of household debt around Europe have left the region vulnerable to the recent credit squeeze and increasing interest rates. Levels of debt are now above 100% of GDP in Britain, Spain, Ireland, Holland and Denmark. Other house price falls have been seen in Spain and France – traditional hotspots.

Central banks across Europe have increased interest rate and they are now having an effect on disposable incomes which are now stretched beyond their credit limit. Interest rates have been doubled from 2% to 4% since December 2005 by the European Central Bank.

Tom Smith
11th September 2007

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