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House price slide hits recovery hopes

By Gerrit Wiesmann in Frankfurt and Andrew Whiffin in London

Published: July 6 2009 19:51 | Last updated: July 6 2009 19:51

European house prices fell more quickly in the first three months of this year than even in the fourth quarter of 2008 when global recession struck, a trend that looks set to dim the region’s hopes for economic recovery.

The FT’s European House Price Index showed the rate of annual price declines in the 16-member eurozone edging towards the even sharper decreases for the wider European region, driven by substantial house-price drops in the UK.

Annual price declines averaged 3.5 per cent in the eurozone, compared with a drop of 0.8 per cent the quarter before, while decreases in all of Europe hit 5.1 per cent, more than double the rate of 2.3 per cent seen at the end of 2008.

The quarterly index, published for the first time in April, pulls together national indices from 22 European countries to provide an overview of the region’s trends. While national trends can vary widely, many do have an impact beyond national borders.

Countries such as the UK or Spain, which have high home-ownership rates and a US-style housing market, once again fared worse than countries like Germany, where renting is still more popular than buying a house or flat.

According to FT data, house prices in England and Wales were 12.7 per cent lower in the first quarter than in the same period in 2008, Spain and France saw declines of about 6.5 per cent, and German prices dipped 0.6 per cent.

The declines were still not as severe as those in the US – in the first three months of 2009 a house there cost 14 per cent less on the year – and they are not expected to hit consumption as broadly as they have across the Atlantic.

Economists warned that falling house prices could still slow construction investment, dent private consumption in some countries, and burden banks – just as the eurozone, at least, showed signs of shaking off recession.

“The two Achilles heels of the eurozone economy – the banks and private consumption – will be hit at a time when many are hoping for first signs of recovery,” said Marco Annunziata, an economist at Unicredit. “Some countries – Spain or Ireland – do have markets that are closer to the US model, and do show a link between consumption and house prices,” he said, cautioning national trends could hamper any regional recovery.



A bigger headache still could be the need for banks to write down the value of non-performing loans, a move which would erode banks’ profits and capital, and reduce only further their ability to finance investment and growth.

“Falling house prices do not necessarily mean there’ll be more [mortgage] defaults,” said Dirk Schumacher, an economist at Goldman Sachs in Frankfurt.

“But the defaults that will come could be more costly for the banks.”

Although European lenders never provided the subprime mortgages that have turned sour in the US, economists do expect recession to increase unemployment and the number of people who cannot pay back loans.

The European Central Bank has signalled non-performing household loans will surge in the latter half of 2009, putting renewed pressure on banks after they revalued securities in the wake of last year’s market turmoil.

Copyright The Financial Times Limited 2009

http://www.ft.com/cms/s/0/742bd0be-6a59-11de-ad04-00144feabdc0.html