After a disappointing home sales print in the US (as the shadow overhang remains heavy), some perspective on just how bad it is in Europe is worthwhile. With Spanish yields starting to blow out again, it likely comes as no surprise that, as Goldman notes, the Spanish housing market (and for that matter the periphery in general) is bad and getting worse. However, Ireland remains the worst of the worst and Goldman sees yet another growing divide between the haves and have-nots of Europe as the residential property price performance can essentially be split into four groups: Strong, Recovering, Weak, and Ireland/Spain; with the latter perceived as considerably worse than the 'reported' data would suggest. Is it any wonder that Spain trades wide of Italy again now and as Citi's Buiter noted earlier, Spain is now the fulcrum market (Spanish 10Y spreads +30bps from Friday's tights).
Goldman Focus: House prices continue to fall sharply in the periphery
Bottom line: There is a wide divergence in housing price developments across Europe. The decline in nominal house prices has been exceptionally large in Ireland, but the degree of house price weakness in Spain may be understated by the headline series.
Significant variation in European housing markets: There has been significant variation in the performance of European housing markets since the financial crisis. Chart 1 displays the decline in nominal residential property prices from their respective peaks, using nationally-reported data collated by the OECD. On this basis, the price performance of European residential property markets can essentially be split into four distinct groups:
- Strong housing markets: Residential property prices in six of the countries displayed – Germany, France, Belgium, Norway, Switzerland and Finland – are at their respective peaks and the recent price trend has been positive. (Dirk Schumacher discussed the strength of the German housing market in this recent European Weekly Analyst.)
- Housing markets in recovery: In the UK, Sweden and for the Euro area as a whole, residential property prices fell in the aftermath of the crisis but have since recovered most of their initial declines.
- Weak housing markets: In this group of economies, property prices fell significantly in the aftermath of the crisis and the recent trend continues to be downward. This group includes most the Euro area periphery, as well as, perhaps more surprisingly, the Netherlands and Denmark.
- Ireland: Such is the extreme weakness of house prices in Ireland that the Irish property market requires a separate category of its own. Irish property prices have halved in value from their peak – more than twice the decline registered in the second-worst performer (Spain) – and the trajectory in Irish house prices remains sharply negative (Chart 2).
Why have house prices fallen so much further in Ireland, when other peripheral states face similar issues of over-supply and constrained lending? Part of the explanation is likely to lie in the extent of the pre-crisis bubble in Ireland, which was larger – both in terms of prices and supply – than in other peripheral economies. On this basis, there are few lessons to be drawn from Ireland’s experience for others in the periphery. But there are other possible explanations:
- Irish house prices have adjusted more rapidly: Wage costs and output prices have adjusted more rapidly in Ireland than in other peripheral economies. It may therefore be the case that house prices have also adjusted more rapidly. One possibility is that the early crystallisation of losses among property developers that resulted from the creation of NAMA – Ireland’s “bad bank” – has resulted in a relatively rapid adjustment to the true market clearing price.
- Spain’s official house price series may understate the “true” weakness of prices: As we discussed in this European Weekly Analyst last year, the “official” house price series for Spain – which is based on the appraisal of real estate agents – suggests a stronger picture than is portrayed by other house price indicators. While the official house price series suggests that nominal prices have fallen by 19% from the peak, a series of asking prices reported by the Bank of Spain has declined by 29% from its peak.