American Foreclosures Influence in Europe

Posted on April 7th, 2009 by saman

European Central Bank (ECB) has injected not less than 200 billion Euros in August, but the action of the European institution has not stopped here. Other 42.2 billion took the path of foreclosures markets, in the context of high volatility that persists. ECB seems determined to keep its word and to power financial markets as long as it is needed.

Despite of apparent similarities, the European real estate market appears to be far from a foreclosures crisis of the magnitude of the U.S. one. In addition, the figures speak for themselves. It is estimated that the real estate prices in the euro area will be higher only by 4.9%, compared with 7.6% in 2006 and the lowest level of growth since 1998, according to data published by Barclays Capital.

In some parts of Europe, prices could drop even by 10 percents. Therefore, the real estate market on the old continent seems to be much healthier than the American one. Sales of homes in the U.S. fell by 12.2% in July 2007, a record percent, and private construction companies have hired the smallest number of workers in the past four years.

However, in Europe, the reference interest rates threaten to increase. With the year 2005, the European Central Bank almost doubled the main reference interest rate, from 2% to 4% and plans another increase for a month. Neither the Central Bank of England has remained indifferent and has brought the reference interest to the rate of 5.75%. Such increases have a refreshing effect on the foreclosures markets, which were once extremely hot. In Ireland, a country where housing prices rose by 12 percent in 2006 and construction of housing was 11% of economy, expensive houses are only 5.1% this year.

One of the consequences of the foreclosures crisis in Europe, more precisely in Britain, is that 300,000 euro is the average price of a house in Britain. The impact of more stringent conditions for lending will be felt more acutely in Spain, where the construction industry represents 20% of the entire economy.

Housing prices in Spain have exploded in the last 10 years, and most buyers have contracted mortgage loans with variable interest. Specialists in the area estimate that here, housing prices will be higher by only 5.6%, down from 10.4% as recorded in 2006.

Britain, which has a healthier economy than the euro area, has already faced a slow growth of the real estate sector, between 2004 and 2005.

It is expected that the price of houses here to be more expensive with 8.8%, compared with 9.1% a year before. In August 2007, the average cost to buy a house in Britain is approaching 300,000 Euros. However, the foreclosures boom in the U.S. apparently has finished.

In Britain, housing prices have increased continuously every year since 1996, according to data shown by the largest mortgage lender here, Halifax. In fact, housing prices have seen an explosion in most developed nations between 2001 and 2006. However, the UK has witnessed the largest growth of European countries, 90% during this period.