Given that there is no one single housing market in Europe, is there any general trend?
Jean-Michel Six: There are different fundamentals operating in each country’s market across Europe and even in the eurozone. The supply-demand situation across countries varies widely, from an excess of supply in some markets to an excess of demand in others, and that’s a very important structural factor. There are different fiscal regimes that aim to influence housing investment, as well as contrasting demographic trends across Europe. Lastly, the region has several slightly different monetary regimes, with monetary policy set by the European Central Bank for the eurozone, and by the Bank of England for the U.K., for example. And their monetary policy conduct somewhat varies, not so much in direction, but more in the instruments they use.
Sophie Tahiri: We do see a general historical trend, though. Beginning in the 1990s, for the first time we saw a synchronized and large rise in housing prices in most developed countries due to increasing income and easy access to credit. Since 2007, these countries have experienced a downward trend, triggered by the increase in interest rates and the financial and economic crisis that resulted in a weakening in household incomes. Consumer confidence, I found, has also been a key factor operating in the housing market. When there is a decline in confidence, prices are likely to follow.
Why haven’t European housing markets, with a few exceptions, started to stabilize yet, like the U.S. market?
Sophie Tahiri: That’s because the adjustment in Europe began later than in the U.S., except in the case of Ireland.
Jean-Michel Six: The fiscal retrenchment that started to take place in 2010 has been deeper in most European countries than in the U.S. It’s taking a greater toll on economic activity, specifically on employment. The rise in unemployment, which has been particularly dramatic on the periphery of the eurozone, in turn further dragged down housing markets at the time when they were already correcting, amplifying the correction.
If you look at the numbers, U.S. households have reduced leverage faster than in most European countries. But that was partly through a higher number of defaults on mortgage debt.
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