European Housing Woes

While the decline in housing prices in America has been making news for some time now, less attention has been paid on this side of the Atlantic to the downturn in European housing. The housing market in Europe, much like that of the United States, "soared during the first half of this decade, rising far beyond the levels that you'd expect, based on traditional economic factors."

The fallout from the bubble is beginning to look the same, if not worse. According to Newsweek, over the first six months of 2008, housing prices in several European nations, including the United Kingdom, Spain, Sweden, and Norway, have fallen "at a faster rate than is occurring in the United States." According to one analyst interviewed by Newsweek, the European downturn is still in an "early stage".

Eastern Europe is also seeing major fallout from deflation of the real estate bubble. According to Reuters, nations such as Bulgaria, Romania, and the Baltic republics of Latvia, Estonia, and Lithuania, have seen property prices plummet as easy access to credit has dried up. A Bulgarian property agent interviewed by Reuters reported that "No-one is buying. Everything has frozen". The credit crunch has led to fears of "a wave of bank and currency crises," which might necessitate IMF bailouts of several Eastern European nations. In the past two weeks Hungary and Ukraine have been bailed out, with the IMF providing loans "totaling $32 billion, in exchange for belt-tightening."

A recent report on European housing by Stratfor argues that the housing bubble faced by Europe was larger than that seen in the United States, and in correcting could lead to a "long-term deflationary spiral". The report points out that in addition to facing overheated housing markets, Europe, over the long-term, faces a "poor demographic situation," with a birth rate well below replacement level. According to Stratfor, this situation "will dampen the demand for housing in the long term and possibly create a deflationary spiral in the housing market".

Not all analysts are so gloomy, with some arguing that "the practice of giving mortgages to less credit-worthy buyers," never reached the same levels in Europe, and that while prices did boom, there is not a "vast glut of never-lived-in houses sitting vacant on the market," which should help to mitigate the situation. Regardless of the severity, it appears clear that Europe is set to face a continued period of real estate value contraction.

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recent rate changes in the UK

Well the last few weeks has seen several interesting developments in the mortgage world.

Firstly, the Bank of England has slashed the base rate by 1.5%, meaning the base rate is now only 3%.

This should be particularly beneficial for anyone currently on a tracker but is unlikely to have a direct effect on new rates. However many lenders have passed on this cut in the form of a reduction in their Standard Variable Rates.

Secondly, as a result of the base rate cut, the 3 month LIBOR rate has been cut by 1%, now sitting at just below 4.5%.

The LIBOR rate is the rate at which banks lend to each other and will have a direct effect on the costs to the banks of obtaining funds, and therefore enable them to reduce mortgage rates.

As a result of the above, nearly all tracker rates have been withdrawn from the market to be repriced. The next few weeks should be interesting as new rates gradually begin to appear again.

But what does this mean to the individual who may be about to remortgage?

Well, two things.

Firstly, the rate that you will revert to when your current deal comes to an end, the lenders Standard Variable Rate(SVR,) will probably be much lower that it would have been a few weeks ago. This may mean that you are better off sitting on the SVR with your current lender rather than moving elsewhere or taking another deal with them.

Secondly, we are due to see a lot of new rates coming out which may well be a lot more competitive than you were expecting. So there could be cheaper options out there.

Also, depending on how rates are repriced, it may be a good time to fix your mortgage rate, although this will depend on your circumstances.

If you are due to come out of your current deal any time soon, speak to an independent Mortgage broker. They will be able to tell you what the best deals out there are for your circumstances and tell you whether it is worth you moving at all or, as is now often the case, you are better off staying where you are.

But what about those wishing to purchase a home? They are still in a tricky spot. Without a substantial deposit, there really isn’t much available. Now you may well say that this is how it should be, and although I agree with you, this is only the case if property prices are reasonable compared to the average income.

For this to be the case, property prices still need to drop by a considerable amount. And although the central banks are assisting those who are in a precarious position with payments going up, it is these difficulties that help to put downward pressure on prices. So it seems to me that the government is in a strange predicament. Either allow prices to fall to the correct open market values at the expense of those who have over borrowed, or assist in keeping prices artificially high.