Are House Prices in Europe in Touch with Reality?

In June of this year, the International Monetary Fund (IMF) called on policymakers to do more to curb rising housing prices around the world....

In June of this year, the International Monetary Fund (IMF) called on policymakers to do more to curb rising housing prices around the world, pointing out that valuations looked high in many countries. 

Stockholm is one of Europe's fastest growing capitals with the population expanding at a rate of 30,000 each year and is expected to grow by 50% by 2030. Despite this, there is little construction of new housing to cater for annually increasing demand. 

Prices driven upwards by increased competition for property 

The climate of low-interest rates in Sweden and other European countries means that people have been able to afford larger mortgages which in turn has increased competition for property and inflated house prices, creating several bubbles throughout Europe in the process. 

In May the European Central Bank (ECB) singled out Belgium, Finland and France as having the fastest growth in house prices and in July, credit ratings agency Moody's suggested Britain showed signs of a new property bubble. 

london posh terrace

London's prime property market shows no signs of cooling down

London's prime markets most inflated bubble 

Before the financial crisis, property markets throughout Europe enjoyed prolonged boom periods after which, property markets followed two separate paths. 

Denmark, Greece, Ireland, the Netherlands, Portugal and Spain dropped sharply; some continue to fall. Others including Belgium, Britain, Norway and Sweden only dipped before rebounding with worrying speed. 

The ratio of house prices to rent provides a comparison between owning and renting properties in certain cities. What someone is prepared to pay to rent a place is that home's 'earnings', similar to the price/earnings ratio used for equities. Where house prices are high compared with rents it is indicated that its earnings are low and that the property is almost certainly overvalued and due for correction. 

Property value determined by 'earnings' potential 

In Norway, the ratio of house prices to rents is 65% above its historical average, 44% above in Finland and 43% in Britain. The property market is further hampered by incomes failing to keep pace and the potential negative impact of rising household debt is a concern across multiple property markets.

In attempts to slow down property markets, some economies have deployed macroprudential tools which are a subtle set of instruments use to maintain stability in the financial framework of an economy.


Setting stricter limits on the amount people can borrow relative to the purchase price or to their household income helps to curb buyers' appetite and increasing the amount of capital the banks must hold against mortgages, curbs irresponsible lending.

Irresponsible lending caused the financial crisis

The Netherlands have introduced macroprudential tools with striking results. During the peak of the eurozone crisis in 2011, the average new mortgage in the Netherlands was 112% of the property's value, placing Dutch household debt among the highest in Europe.

In order to slow down the property market it was essential to introduce measures such as capping loan to value (LTV) at 106% in 2012 which is due to fall to 100% by 2018. Capital requirements for banks were also raised immediately in response to the inflationary housing market.

After accounting for inflation, house prices have fallen by 20% in the Netherlands in the last 3 years as a direct result of the government's measures.

Economic recovery depends on pro-active governments

In sharp contrast, the government of neighbouring Belgium has not intervened pro-actively with property markets and as a result, Belgian house prices have increased by 11% over the last year. Belgium's market is now considered to be so over-priced that its buyers are credited with helping to revive prices in the south-eastern part of the Netherlands by moving over the border.

For European policymakers, the situation is made more complicated by the fact that Europe's property booms are mostly in capital cities where growth is far greater than the country's national average.

building site

Widespread construction of new homes is required across Europe to meet rising demand

Population growth in capital cities also tends to outstrip regional figures and house price increases can be attributed to lack of supply and aggressive competition in the market.

Construction of new homes needs to be stepped up throughout Europe

For example, Dublin - which needs 8,000 homes a year, with fewer than 1,400 built last year – has seen exponential price growth, up 23% over the past year even though the rest of the country saw a more modest increase of just 5%.

Shortage of housing is another issue that affects European countries on a regional basis although the number of new homes completed in the European Union fell by a third between 2011 and 2013. Only three countries (Britain, Belgium and Germany) started building more homes last year that in the year before. In Paris the shortage of new homes is so severe that there have been reports of illegal dwellings in cupboards and garages!

The UK has devised some clever measures to increase new housing supply by introducing a new 'right to contest'. The government has launched a website that maps all its land and buildings, from offices to prisons, with an invitation to the public to suggest better use for them under the scheme.

British government takes action to increase housing supply

The government has also promised to release for sale any property whose current use cannot be justified and it is now easier to convert unused offices and shops into houses.

rental cottage

A Swedish rental cabin or 'atefallshus' which can be constructed without planning permission

An interesting innovation has been introduced in Sweden which kicked off in July, allowing landowners to build tiny rental cottages in their gardens. The property can have a footprint of no more than 25 square metres and must be no more than 4 metres high and requires absolutely no planning permission.

Spanish property market one of only to show realistic value in Europe

In countries such as Spain where there has not been a property bubble and house prices have continued to fall in recent years, stability is now returning to the market along with strong economic growth for the country among the worst hit by the financial crisis.

puerto banus marina

Puerto Banus Marina - Spain is one of the remaining pockets of value for property in Europe

Spain's property market remains comparatively cheap as the prevailing austerity measures continue to cause financial hardship for its population. Increased foreign investment has yet to result in rising prices although it is now widely felt that the bottom of the market has been reached.

Along with Portugal, Spain's 'Golden Visa' scheme has boosted buying among non-EU investors with more investment revenue being received from Asian buyers than ever before.

Where a bubble exists, there is a parallel market offering value. It can be in the same country or anywhere in the world but there will always be opportunities to make solid and sustainable returns from property and it remains the asset of choice for those seeking a safe haven amidst speculation that equity markets may be due for significant downward correction.






- Tuesday 02 September 2014

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