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Weekly UpdatesMarkets Stagnate and Decline
Gloom spread to all of Europe's housing markets in 2008. By year end prices were either stagnant or down. In fact, in real terms, prices were falling everywhere by the end of the year, given that inflation had been quite high in several countries and averaged 1.6% for the EU as a whole by the end of 2008.
There were some substantial turnarounds from market experience in 2007. Scandinavia, central and eastern Europe and some parts of the Mediterranean, such as Cyprus, were still experiencing prices surges in 2007 but no longer in 2008, with the sharpest reversals in the Baltic States.
Not even the countries that previously did not experience house price booms are immune from the housing market squeeze. Most notably, prices in Austria and Germany are drifting down. The reason, of course, is that they are being buffeted by the same events as the markets in other countries.
Geography seems to matter. The Nordic countries apart from Sweden, Spain, Ireland and the UK, and recent EU member states from central and eastern Europe seem to have had a particularly tough time in 2008. For most other countries, prices seem flat or falling slightly in real terms. This seems to offer the hope that they will miss out on severe downswings. It is hard to say but the signs in the closing months of the year were that progressively more European housing markets were seeing a slump in buyer interest and severely limited ability to raise finance for purchase.
The twin shocks of first commodity price booms that pushed up interest rates and dented economic growth, followed by a credit crunch of unprecedented scale in modern times has affected the whole of Europe and its housing markets. The prospects for 2009 are of a further weakening of housing markets, so price falls may accelerate in quite a few countries and become apparent throughout the whole of Europe in 2009.
The decline in housing markets is being further influenced by the scale of the economic recession in Europe. The IMF forecast in January 2009 that the euro areas' economy would decline by 2% and the UK's by 2.8% during 2009, though hopefully with a levelling off in 2010. Such gloom may be amplified in housing markets, which look set for a prolonged downswing at least as great as that of the early 1990s.
The recovery may also be a slow one because of the core importance of long-term finance for healthy housing market activity. The financial system has been battered because of mortgage finance, and the riskiness of holding mortgage debt for investors and lenders rises as house prices fall. Such feedback effects between housing markets and financial systems suggest that restoring confidence in housing finance systems is going to take a long time.
Watch That Price!
The main difference in posted price information across Europe is that there were clear groups of countries already going through a cycle of substantial prices falls in 2008, whereas others were not. However, there are difficulties in interpreting the information for data reasons as well as because of factors relating to distinct housing market dynamics between countries themselves.
The first issue relates to the time at which price data are published. In past years, the author of this review has made year end forecasts for each country to enable cross-country consistency. These forecasts could be made with reasonable confidence as they were only for a few months and so were generally accurate representations of actual price changes. The tumultuous events of 2008 have made such an exercise more prone to forecasting errors and, so, it has not been done this year. Price dynamics were changing so rapidly during the last quarter of 2008, driven by the heightened impact of the credit crunch and its consequences for mortgage availability and consumer price expectations. A consequence is that such differences in dates was far more important than it would normally have been, especially as the winter months are usually quiet ones in housing markets.
This means that the reported data in Figure 1 may relate to different times within 2008. For a handful of countries the data are actually end of year ones but several are third quarter information and others for one of the last three months of the year. The least timely data are for Denmark, Greece and Belgium. Consequently, prices in some of the late reporting countries were most likely to be lower at the end of the year than is shown.
[FIGURE 1 OMITTED]
With regard to the content of house price data, there is no standardised way of reporting house price information across Europe. So, it varies considerably in terms of its representativeness, timeliness, market spread and accuracy. There may be nothing inherently wrong with the different price indices in terms of their own definitions--they are what they are--but they have to be interpreted carefully, especially when making short-run cross-country comparisons of price change.
Many of the issues are known to data experts. The exercise to produce reliable and consistent house price information across the EU apparently progresses but the day when last month's price information for each EU country can easily be downloaded from Eurostat still remains a distant prospect. In the meantime, it is important to be aware that some countries' indices in effect smooth price changes in relation to others and some exaggerate them. Quite what are the comparative effects depends on market dynamics and the stage of the house price cycle.
Another factor is that house price data are reported with different lags from the point of sale. When the buyer and seller agree on a price for a property, it can be several months or longer before the transaction enters a house price index estimate. Some indices are based on asking prices, so in those indices prices have not been agreed. What is more in falling market final prices are likely to be lower than the ones that the seller is hoping for. Other indices are based on mortgage data at various stages of the mortgage negotiation process. Some derive data from the dynamics of the legal side of property exchange. Others are based on the time at which properties are recorded in a land registry. Even within each of these stages, the time at which the price is recorded and entered into a database can vary significantly between countries. For example, Spanish institutions appear to be particularly slow at recording prices, while the length of time to complete the property transaction fully is notably lengthy in England. The overall implication is that the prices recorded across countries at specific points in time are highlighting market conditions at different times.
Another feature relates to the mix of properties being recorded in prices indices and traded on markets. Some house price indices are not composite weighted ones of all market transactions but, instead, refer only to specific parts of the market. For instance, Scandinavian indices separate out particular house types and generally the dominant category of single family housing is reported. Yet, in these countries, apartment markets are currently faring worse than single family ones. The situation is similar in Germany where the values of terraced homes are often reported as the house 'price', excluding weaker apartment price changes.
Further complications are added because some indices relate to the prices of dwelling units, whereas others as per square metre. The sizes of properties can change over time and the unit indices do not necessarily pick this up, even when 'quality-adjusted'. Other indices may refer to solely new build apartment markets and to only particular cities rather than to countries as a whole. This is common for central and eastern European countries' price indices and makes their behaviour particularly volatile.
When markets turn down the builders of new homes frequently do not adjust asking prices for a long period of time on schemes they are currently building out. Instead, they are prepared to negotiate over price and offer non-price inducements to persuade buyers to buy. When new building is particularly important, recorded prices may lag true market developments. New building has been high in Ireland and Spain and, though both indices record agreed rather than asking prices, there is no knowing what extra elements were added to the product bundle as the market started to soften, so the extent of price changes is likely to be under-recorded.
The reported price indices for many central and eastern European countries may simply be the asking prices, such as with Poland. Actual market prices are likely to be less than those during a downturn because of improved quality offers and the fact that the negotiated price will typically be less than the asking one because of the strengthened bargaining power of buyers in such situations.
Finally, the best quality properties tend to be sold more quickly when sales are slow, while the worst languish until sellers accept reality and cut prices to realistic levels. Recorded prices as a result move slower than those struck in actual quality-adjusted deals.
This long list of the differences between house price measures suggests a couple of rules-of-thumb. First, if one country's house prices seem to be changing faster than another's check what is being measured. Second, when interpreting data on a comparative basis, the direction of change may be as important as its scale because of such data differences. Only with hindsight, when a better picture has been gathered over a longer time period, will a clearer understanding emerge of what cross-country differences actually were and, even then, the world of house prices indices remains at best one of approximations.
Short-Run Dynamics in European Housing Markets
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