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Europe's Housing Markets Come To Rue High Indebtedness As Boom Turns To Bust, Says Report

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The risks posed by high levels of household indebtedness among European economies are thrown into sharp relief by the collapse in the U.K., Spanish, and Irish housing markets, says a research report titled "European Economic Forecast: Boom Turns To Bust In Exposed Housing Markets," published today by Standard & Poor's.

"Europe's housing markets have enjoyed a spectacular boom in the past eight years, at levels closely comparable with that in the U.S.," said Jean-Michel Six, Standard & Poor's chief economist for Europe. "Yet, levels of household indebtedness vary considerably across European economies. On the one hand, there are countries with outstanding mortgage debt exceeding 50% of GDP such as Denmark, The Netherlands, the U.K., Spain, and Ireland. On the other hand, Norway, Sweden, France, and Italy have relatively low levels of debt in spite of the recent rise in their housing markets."

As the report points out, the U.K. housing market is confronted with two evils at the same time: Affordability and availability. Since its peak in August 2007, the U.K. housing market has been declining more rapidly than after the previous peak in May 1989, when prices from peak to trough were down 13% in nominal terms. This time, by contrast, prices are already down 9.6% over the period from August 2007 to June 2008, suggesting that the overall decline is likely to be far more dramatic. A 25% fall from the August 2007 peak would simply bring the affordability ratio back to 4.4x earnings, close to where it was on average in 2000, when the current cycle started to gather pace. Such a drop is reasonable to allow market fundamentals such as affordability to return to their long-term averages.

This implies that prices are facing another 17% decline from their June 2008 level, with a trough occurring around April or May of 2009. According to our calculations, a 25% peak to trough decline in house prices would place about 14% of borrowers (around 1.7 million) into negative equity. Compared with the previous downturn in the late 1980s, this correction is therefore likely to be much shorter, and more severe.

In Spain, a combination of higher interest rates, oversupply, and a deteriorating economic climate all point to a prolonged decline in house prices. Unemployment in the construction sector rose 70% in the 12 months to May 2008, while permits for residential homes dropped 60% year-on-year in the first quarter of 2008. In contrast with our projections for the U.K., Spain could experience a longer correction, albeit leading to a similar decline in house prices (about 25% peak to trough).

In Ireland, real residential construction spending fell by around 25% in the first three months of 2008, but this was outstripped by a decline of 55% in the number of housing starts, suggesting that the slump is still gathering pace. And house prices? They fell 10% in the 12 months to May 2008, and are down 12% from the peak reached in January 2007. Here, we expect a peak-to-trough decline, from January 2007 to December 2008, of slightly more than 20%.

The downturn in the U.K., Irish, and Spanish housing markets is no surprise, but other European markets are also presenting signs of easing. This is particularly true of France. One of the three fastest-growing markets in Western Europe between 2000 and 2008, the French housing market is likely set for a period of stabilization or modest price declines. Factors at work here include a surge in inflation (1.6% over the first half of this year), which, combined with lower growth in disposable incomes (1.9%, compared with 2.5% in the second half of last year) will slow purchasing power growth to a mere 0.3%. Equally unhelpful, the recent weakening of the sterling against the euro, and the weak dollar, will weigh on demand from nonresidents.

The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com


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Appears naïvely optimistic to me, and reading it, I had a feeling that in years to come we would think, reading over this again, that the analytical tools used to produce a report such as this were completely inadequate to estimate the true catastrophe that was about to engulf not only the housing markets, but the entire economies, of the countries under discussion.

Ireland 20% off. They're having a laugh (e.g.).

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