Article in the Telegraph today, Overheating sees house price downturn in Europe Last Updated: 1:07am BST 27/08/2007 House prices in the overheated markets in Europe have begun a downturn , writes Ambrose Evans-Pritchard House prices on the overheated fringes of Europe have begun to turn down sharply, replicating the early phase of the sub-prime property slide in the United States. Housing booms in Romania, Bulgaria, Croatia, and even Russia are all looking stretched to extremes Irish property has fallen for the past four months in a row as higher eurozone interest rates start to bite harder, while the speculative bubble in the Baltic states has burst. House prices in the greater Riga region of Latvia fell 3.5pc in June, following a 1pc fall in May. Flats in the old city became more expensive than Berlin by early this year in a speculative frenzy, much of it with euro, Swiss franc, and yen mortgages that could prove disastrous if Latvia's currency is suddenly devalued - as may well happen, given the country's current account deficit has exploded to 26pc of GDP. Similar booms in Romania, Bulgaria, Croatia, and even Russia are all looking stretched to extremes. Danske Bank has warned that much of Eastern Europe has been inflated by a "monster bubble" that recalls conditions in east Asia shortly before the crisis broke in 1997. In Ireland, house prices dropped 2.6pc in first six months of the year to June, with falls of 3.3pc in Dublin. The slowdown is rapidly spilling across into building. House registrations are down 34pc over the first half. Roughly 15pc of housing stock lies empty, according to the Irish census. Jean-Michel Six, chief Europe economist for Standard & Poor's, said extreme levels of household debt across large parts of Europe left the region vulnerable to tightening credit conditions. Debt levels are above 100pc of GDP in Ireland, Britain, Spain, the Netherlands, and Denmark. advertisement "Spain is heading south. Local real estate companies have reported price falls on a quarter-to-quarter basis in Madrid and several other provinces," he said. French property prices fell 1.5pc in July - though they were still up 5pc over the year. "House price inflation could turn negative in the second half of this year," he said, adding that proposals by President Nicolas Sarkozy to allow new buyers to offset part of their interest costs against tax would help support the market. "The spate of interest rate rises by central banks is exacting its toll on disposable incomes already weighed by rising household indebtedness," he said. The European Central Bank has doubled rates from 2pc in December 2005 to 4pc. The recent turmoil has pushed up the effective rate of borrowing even further in some countries. ----------------------- I seem to recall property secrets saying everything is great in spain ......... This news article refects my reasoning on the global property market - avoid risky boom areas during economic uncertainty. Just one more article that reflects the turning of market sentiment.

Fantastic news that Latvia's property prices are heading south. This may well signal a safer, more sustainable phase to the economy.

... Property Secrets said 'there will be no crash' in Spain. Property Secrets ALSO said that there will be bargains in the Autumn (that means there will be some downward movement in a small number of properties - but the majority of properties simply won't be bought nor sold as buyers and sellers won't agree about the price). Property Secrets has persistantly said (for about 8 years now I believe) that crashes only come when increase in interest rates is accompanied with unemployment - and Spain's (Again - yawn) top of the tree GDP performance in Q2 (smashing that of soon to boom Germany). (Germany achieved just 1%, Hungary achieved 0.8% and Spain achieved 3.2% in the second quarter). Property Secrets also stopped dealing in Latvia some time ago - so, that is good to hear that we got that one right. The reason being that a market as small as Latvia (ie a Hong Kong) is much more suscepible to speculation driving prices too far. What this article quoted above is tell us about the past! This has already happened. To invest - we need to think about the future - now and for the next 5 to 10 years. Let's talk about the future - not get caught up in the 'what happened' reporting of property prices. One that has changed over the summer is the talk of further interest rate rises. This has almost certainly stopped now for the present and we may see some easing in the Autumn. It would be on this basis that I would make forecasts about short term investment opportunities - rather some a backward looking view. I suggest that the Telegraph would do well to speak to our Chief Analyst before they write their next report. Cheers Neil

I agree with Neil on this one... From a former Fleet St journalist here's a few observations... If you're a journalist working on the Telegraph then in the Friday editorial meeting Monday's paper will be being discussed (Monday is always the hardest day of the week to produce a paper for cos the weekend teams have been working on their stories for Sat and Sun editions all week, which means Monday's edition is frequently full of generic stories, as not enough happens on a Sunday to fill the paper.) So the editor says 'right team, story bigging up European housing gains, or story saying that everything is going to end in disaster and the whole of Europe is crashing?'. They discuss that recently everyone is talking about slowing UK prices, interest rate rises, bankrupcies, US debt problems, Spanish crash etc so the obvious thing is to run a story about how all this will spread to Europe and end in disaster. After years of 'house prices inflation going thro the roof stories' this is now old hat, and disaster stories are now much more eye-catching. So whichever journalist is given the story literally goes away and sets about finding enough experts with a negative view to make the facts fit and the story stand up. This is precisely how this kind of journalism works. Just take a deeper look at some of the headline points in this story as evidence of this... '....while the speculative bubble in the Baltic states has burst.' - This would suggest an enormous region comprising many countries. The article sites greater Riga only...where else has it burst? 'House prices on the overheated fringes of Europe have begun to turn down sharply, replicating the early phase of the sub-prime property slide in the United States.' - It's worth noting that any dip in any price chart looks like any other dip in any other price chart, but that doesn't mean a dip in one place will be 'like the sub-prime property slide in the US' 'Housing booms in Romania, Bulgaria, Croatia, and even Russia are all looking stretched to extremes' - yes you can say that about any market which has been booming for ages, but how is Russia possibly comparable with Bulgaria? (a world apart in terms of property available, coasts, interest rates, economy - everything in fact). In short, there's always at least 4 places in the world where property is overheating or undergoing a correction, but that doesn't necessarily = a meaningful trend. 'House prices in the greater Riga region of Latvia fell 3.5pc in June, following a 1pc fall in May. Flats in the old city became more expensive than Berlin by early this year' - of course this sounds really dramatic and most people who know nothing about property would read this and think it was shocking. What most of them wouldn't know is that property in Berlin is dirt cheap to start with. etc etc So what this article really tells us is that... - property is Riga is overpriced and correcting. This has been well known for ages. - Likewise Ireland - interest rate rises are squeezing borrowing - well known already - foreign currency mortgages are at risk of devalueing. Nothing new there. - some French property is in trouble. No surprise there - It's well known that the French long ago legislated themselves into economic reverse. This isn't a very informative or new story - remember, six sandwiches don't necessarily make a picnic! Dan

Richard it's taken a few months for you to find something to support your doom laden predictions of earlier this year. As said by others this is a typical badly researched assumption-ridden piece of journalism. If anything I would take positives from the fact Ireland hasn't crashed and is edging off sensibly even in the face of euro interest rates above the level its economy requires currently. As for Europe repeating the sub-prime crisis in the US - have you ever tried to get a mortgage in Europe. Most countries with "developed" mortgage markets have very strict conditions on the percentage of post tax income you can spend on a mortgage so there is no sub-prime market. As for E Europe, it's been known for some time that Latvia in particular has overheated but that doesn't translate to the other markets which have very differently performing wider economies. As for the mortgage markets in these countries they are very new so any suggestion of sub-prime lending is ridiculous. As Neil says, ineterest rates have probably peaked and a period of sensible growth or slow decline in some territories is not negative in the long run. Huw

This is about fear and uncertainty, how negative sentiment in the press causes wider spread negativity. The average person is driven by their perception of reality, not reality in itself, - which is most often determined by what they read in the newspaper and what they talk about with their friends. Simple fact is people are afraid, there is all this bad news around them - supposedly facts, massively overpriced housing, and in a country with 100% of GDP now accounting for debt. All that is required is a trigger under such sitations. Im thinking sub prime is the trigger. I agree that article is not a good article - fear inducing reckless reporting, but it is a good example of what is driving the general population. I will go by public opinion over ANY analysts predictions of boom or bust since public opinion drives supply and demand. Of course when the general population become aware of a problem the scales of balance have already tipped into the red, - already too late. The general population DO after all have good reason to be fearful. I do not recall the press being SO negative - not in my life time. I have every confidence in the market analysis of Property secrets, - (I would not be a member otherwise) in sofar as its as good as it gets. However when these things happen it usually catches everyone out - especially the analysts Im a member here so as to invest abroad, to find a safehaven from the gathering storm. Hope you guys can find me the right place to invest. Considering the potential problems of the next few years where do you think will be the best place to invest?

Dear Noah If I were you I'd build an Ark out of wood and fill it with 2 prime specimens of every living species. Then sit back and wait for the worst to happen! Mark

Hi Richard It is a fair point to say that we at PS don't have all the answers! True. That for me really means that 'the buyer should beware' and we are sharing ideas and opinions not guarantees. However, in the 8 or so years that I've been doing this I have seen so many doom monger and they've all turned out wrong so far. I believe this is a function of the following i) modern journalism requires emotion to sell newspapers - therefore, many papers run boom stories one day and bust stories the next ii) having spent 12 months 'bigging-up' a story (ie CEE is the next hotspot) journalism will then spend the next 6 months destroying it! (It's not personal, but it does sell newspapers). My gut tells me that we have the same thing going on here - and that you are basing your experience of things on newspaper reports. That is why I think your prognosis is incorrect. Countering the journalists pessimism is the fact that when things look gloomy investors pile out of shares and jump from clever debt bonds and head for dear old bricks and motar. Oddly, pessimism is good for property. It just takes a few weeks for the dust to settle and then off we go again. So, what really drives property markets up and up? i) demographics ii) world economic growth This is what I care about - and if you are going to persuade me to change my view on property (as perhaps one day I will) then you'll need to base your argument on these. A global recession - and massive job losses - yes, that would do it. What might bring this about? Massive protectionism and tarrifs would do it - not much else could. Perhaps some scary politics might do the trick. Terrorism hasn't succeeded. Demographics? If we all started dying younger - due to too much time in front of computer screens - then again, you'd persuade me. Otherwise, we'll need some kind of epidemic. We've had AIDs scares, foot and mouth, SARS, bird flu - and whilst they have left scares (particuarly on poorer regions), on a global economic scale the have left little impact. That's what it has to come down to - for me anyway. Cheers Neil

Absolutely right, Mark. Spread your risk, hedge your bets, and prepare for the floods, which may (or may not) come. The point is they also recede. That's why the long investment view is so important and why investors who use pound cost averaging succeed just as well as those who try and predict the market - any market. It's also relevant that the headlines have been negative on property for years (although they had a break for a while until the latest sub prime fiasco), but the public has continued to invest in property at every opportunity. Of course newspapers and all media use so-called shock headlines because they are trying to reflect the 'what if the worst case scenario happens' questions people always ask when confidence slips. And all the media will always choose to stimulate the fear factor rather than take the 'don't worry, be happy' approach. The former sells and is read and watched more than the latter every time. The sub prime fiasco happened because there was so much credit sloshing about and available that lenders were forced to look for increasingly risky places to sell it. But if you say to someone, 'you're basically a very poor credit risk, and you've always defaulted before, but I'll lend to you if you pay MORE than someone who has a good payment record', what can we expect to happen when rates rise? The sub prime borrower has zero incentive NOT to walk away from their debt. They have lost nothing. The credit crunch and the halt to reckless lending is long overdue, in my view, and some big players will be hit hard by the sub prime implosion (HSBC for one). The trouble is no one knows quite who is exposed and by how much. But, as usual, the markets over-react to good and bad news - and we're still a long way from the markets' volatility spilling over into the real economy. But, if it does, pretty much ALL assets will be hit. So, to borrow Mark's metaphor, check your ark is waterproof because there's unlikely to be dry land anywhere! And remember the floods will fall back.