According to a Deutsche Bank expert, the period of housing bubbles in the eurozone as a whole is over, the threat of a collapse remains only in two countries
As Deutsche Welle reports, the expert from the Deutsche Bank Research Center in Frankfurt am Main based his analysis on the ratio between real estate prices and income levels. A sharp deviation from the long-term norm in the 11 largest eurozone countries was observed in 2007-2008, the specialist recalls, but now the 'exaggeration', as he puts it, has been almost completely eliminated.
This is especially true for Spain, where the construction boom of the 2000s led to a 'bubble' that, when it burst, plunged the country's banking system into a severe crisis. But in recent years, the Spanish residential real estate market, according to Jochen Moebert's calculations, has completely shed overpriced values. Prices fell by almost 40 percent from 2008 to 2013, after which they rose somewhat.
Prices in Italy are now also at an economically justified level. Here, housing has become cheaper by 20 percent from 2008 to the present day, which, as the expert emphasizes, has eliminated the previously observed slight overvaluation.
In Ireland, the collapse during the recent crisis was roughly as powerful as in Spain, and in 2013 prices were severely undervalued. Since then, they have risen by more than 30 percent, and now the 'housing cost-to-income' ratio has returned to the long-term average, notes the Deutsche Bank specialist. Due to high economic growth rates in Ireland, he expects housing prices to continue rising there.
In another former problem country of the eurozone, Portugal, current residential real estate prices can be called favorable, says Jochen Moebert. He does not expect significant growth in the foreseeable future, citing relatively low economic dynamics, a fairly high level of household debt, as well as demographic factors – an aging society and active emigration.
The Deutsche Bank expert considers housing prices in Greece to be favorable, even undervalued. Since 2007, they have fallen much faster than incomes, as a result, the ratio between prices and incomes is now below the long-term average. Currently, the market has bottomed out and is stabilizing there, Jochen Moebert points out. In other words, he does not expect further price declines, but he also does not count on significant growth (unless, of course, a strong upturn begins in the Greek economy).
The author of the study also sees no potential for noticeable price growth in France, Finland, and the Netherlands, but for a completely different reason: housing in these countries is already very expensive. Compared to other large European real estate markets – Spanish and Italian – the French market has corrected the exaggerations of recent years to the least extent, emphasizes Jochen Moebert.
In his opinion, further growth of already high prices in France will be hindered by a noticeably increased level of household debt. Moreover, only a slow increase in incomes is expected here in the coming years. All this will limit effective demand for housing and, conversely, increase the risk of price declines.
But the Netherlands and Finland, unlike France, are threatened not just by a decline, but by a 'sharp correction' in real estate prices, warns the Deutsche Bank expert. The reason is the rapidly growing debt burden, which has doubled among Finns since the introduction of the euro, and among the Dutch, due to tax incentives, has reached an exorbitant 110 percent of GDP.
But the most alarming situation, according to Jochen Moebert, has developed in two relatively small countries – Austria and Belgium. Here, housing prices have doubled since 2000, as a result, the gap between them and incomes has reached record levels.
There is a clear exaggeration in these two markets, so even a small increase in lending rates could trigger a price collapse, the expert warns. Moreover, he even names an event that could serve as a trigger for a serious correction: the winding down of the European Central Bank's (ECB) program of purchasing eurozone government bonds, which, according to Deutsche Bank's forecast, will occur during 2018.
As for the largest residential real estate market in the eurozone – the German one – prices on it at the moment can still be considered economically justified, states Jochen Moebert. The fact is that in the 2000s, housing in Germany did not appreciate but depreciated, and therefore the 50 percent price increase since 2009 has only led to a normalization of the situation in a previously undervalued market, the expert believes.
However, in the coming years, a combination of several factors – housing shortage, population growth due to labor migration, and an influx of foreign capital, which will partly go towards purchasing real estate – will make a 'bubble' in the German market inevitable, warns the Deutsche Bank analyst. His forecast: by the end of this decade, the German residential real estate market will be the most overvalued in the entire eurozone.