Euro markets in hike ‘hangover’

Europe’s property markets are still suffering the effects of 2007’s rate hikes…

The majority of housing markets slowed sharply or slid backwards across Europe during the second half of 2007 in response to inflation-induced interest rate rises, according to the European Housing Review 2008.

The prime cause, according to the report, has been the general rise in mortgage interest rates over the past 18 months. The knock-on effect of European Central Bank interest rate policies and general rises in interest rates have led to the noticeable slowing of Europe's housing markets.

The recent autumn credit crunch is yet to have significant impact, with household lending remaining fluid across the majority of Europe. However, the UK is one of the few countries to experience noticeable drops in borrowing levels.

Cyprus (15%) and Iceland (15%) were the only countries in which house prices outstripped their 2006 growth.

Baltics battered

Ireland was one of the worst-performing markets, with house prices falling at an estimated 7%. The Baltic States were also hit hard, with early year prices rises wiped out from summer onwards.

Poland recorded the highest rate of price increases (28%), however the reality of post-summer market conditions offered a sharp wake-up call. Oversupply issues have arisen due to an overhang of unsold property and the swift shift made by foreign investors’ from 'buy' to 'sell'.

Germany’s economy may have turned a corner but this is yet to be mirrored in its housing market. Meanwhile, the slowdown in the French economy has hit its housing sector, with Belgium, the Netherlands and Scandinavia also experiencing similar ‘quieting’.

Interest rates have also had a strong impact on the Spanish market with house price growth slowing to 3%. A more significant market decline is foreseen in 2008.

UK house prices were found to be the strongest of the big four recording 8% growth. Though the record from Autumn 2007 onwards has been one of gradually falling prices, anticipated interest cuts this year however should limit subsequent price falls.

Greater flexibility

The report's author, Professor Michael Ball, said: "The often repeated dilemma currently facing monetary authorities is that slowing economies - and housing markets - need lower interest rates, but higher inflation is against them. How Europe’s housing markets fare in 2008 depends on how that tug-of-war develops."

“There are prospects for some house price falls during 2008 but the scale of any housing market downturn is likely to be far less than the last downturn in the early 1990s. The UK housing market looks much better placed than many others in Europe because of the greater interest rate flexibility.”

Rebecca Gill Head of International Research at Savills, co-sponsors of the European Housing Market Review, comments: “This research illustrates the broad trends that impacted on European Housing markets in 2007.

“Except for Ireland and Germany, all markets experienced upward movement in house prices with Poland coming top of the table for the second year in a row.

“However, the final quarter of 2007 saw a sharp slowdown in the rate of house price growth which is likely to continue for much of 2008.”