Property slumps not yet close to being over in Spain and Ireland, academic research suggests

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Little hope for recovery in EU countries such as Ireland and Spain

The real estate markets in Germany, Japan and the US are heading for recovery but there is little prospect of the property slumps in Spain and Ireland ending soon, according to new research.

And economic recovery is without a housing market recovery is unlikely to be sustained, according to the report How Housing Slumps End by academics Agustín Bénétrix, Barry Eichengreen and Kevin O’Rourke.

They say that there is at least a one in eight chance of housing slumps in the three big economies, Germany, Japan and the US, ending imminently, and it must not be forgotten that is was a real estate bubble that started the economic global downturn.

The report says that changes in house prices can powerfully impact consumer confidence and this varies from country to country. But generally the duration of a house price bust should be related to the size of the preceding boom.

Financial conditions also matter. A 1% increase in the real mortgage rate reduces the probability of a slump ending by 8.6 to 10%, it points out.

The report also suggests there is a smaller chance that the housing slumps could now be ending in Finland, France and New Zealand. But in Spain and Ireland the real estate bubble were so big there is no great prospect for immediate economic recovery. ‘Our estimates suggest that ongoing housing slumps will continue to add to their woes. The 3.6% year on year fall in Spain in the recently completed second quarter of the year is consistent with this prediction. So is the 4.2% decline in asking prices for Irish residential properties in the same period,’ the report says.

Allowing prices to adjust downwards rapidly in these countries is the best way to ensure that they eventually stop falling. The academics analysed 44 previous housing slumps to come up with degrees of probability. They found that when house prices fall for more than 30 successive quarters, or seven to eight years, then price falls ‘take on a life of their own’ because buyers and sellers come to expect even more price falls.

‘If things turn out as projected here, we may be about to have a test of the locomotive theory, whether the big economies can pull along their smaller brethren, both for housing markets and generally,’ the report concludes.

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