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Wolfgang Münchau, Eurointelligence: The Coming House Price Crash In Europe

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The coming house price crash in Europe

Published: Tuesday 25 September 2007

Wolfgang Münchau, EuroIntelligence

The property market is one of the transmission mechanisms on the path "from a credit squeeze to a recession", argues Wolfgang Münchau in an article for EuroIntelligence.

Over the last few decades, the US, the UK, Spain, Ireland and central Europe have all been affected by house price booms, observes the 24 September article.

He therefore examines the potential reasons for this price increase. Supply constraints such as building restrictions and excess demand have only a minor impact on prices and cannot realistically be held responsible for the increase in house prices. Home improvements such as air conditioning cannot explain the persistence of the phenomenon either, he adds.

The causes of the extreme house price increases can only be credit, states the author. He cites the example of Spain, where it is easier for people on low incomes to obtain a mortgage than rent an apartment. Such practices do not need any regulations to crack down, the author says, as the "market has done it for us."

A much more sensible lending system was used in the 1990s in the UK, where mortgages were offered at a maximum of 95% of a property's value and a maximum of three times the buyer's income, recalls Münchau.

Following the return to a more normal credit market, prices started to fall in the second half of 2006 in the US and the European property market is expected to see falling prices as well, states the paper.

However, the change in the economic trend will have negative consequences in Europe as some European countries are strongly dependent on the property market, says Münchau. Moreover, it is unlikely that central banks will give up any pretence of pursuing price stability to help property markets at a time when oil and commodity prices are reaching new records, he adds.

The paper quotes statistics produced by the Italian economist Tommaso Monacelli which show the correlation between house prices and private consumption. These statistics found that the highest rates are in the UK, Spain, Denmark, the US and Canada.

According to the author, this raises the question of whether the superior economic performance of these countries was due to the credit boom. We will soon have to give much greater weight to the importance of money and credit, he concludes.

* EuroIntelligence The coming house price crash in Europeexternal (24 September 2007

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