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Recession keepshouse prices in the dumps in most european markets

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le previsioni di standard & poor's per il mercato immobiliare

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Recession keepshouse prices in the dumps in most european markets

  1. 1. Economic Research:Recession Keeps House Prices In TheDumps In Most European MarketsCredit Market Services:Sophie Tahiri, Economist, Paris (33) 1-4420-6788; sophie_tahiri@standardandpoors.comJean-Michel Six, EMEA Chief Economist, Paris (33) 1-4420-6705;jean-michel_six@standardandpoors.comMedia Contact:Mark Tierney, London (44) 20-7176-3504; mark_tierney@standardandpoors.comTable Of ContentsBelgium: Growth Is Cooling As Transactions SlowFrance: Home Price Declines Appear To Be Gaining MomentumGermany: Rising Prices Are Still Bucking The European TrendIreland: Starting A Long Road To RecoveryItaly: Economic Woes Are Dragging House Prices Down FurtherThe Netherlands: House Prices Are Under Pressure As ConsumerConfidence DeclinesPortugal: The Market Still Sliding Despite Attempts To Revive ItSpain: A Glut Of Unsold Homes Will Keep The Market DepressedU.K.: Mortgage Relief May Help Lift The MarketWWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 11123007 | 301015591
  2. 2. Economic Research:Recession Keeps House Prices In The Dumps InMost European MarketsThe bearish tendency in most of Europes housing markets looks set to continue this year as the recession bites.Standard & Poors forecasts that house prices in most countries will stay on a downward path through the year, andthat declines will only slow or stabilize in 2014. Spanish households are feeling the pain most severely. We predictprices will fall by 8% this year and by another 5% in 2014, as precarious economic conditions deter buyers and asswathes of unsold housing stock drag on prices.House prices in France also appear to be undergoing a protracted correction after decades of double-digit growth.Tight fiscal policies, the anticipation of higher taxes over the coming 18 months, and a likely continued rise inunemployment will keep the market declining by 5% this year and next year, according to our forecasts. Whats more,indicators show that residential real estate in France remains expensive by historical standards, with prices to incomesstill 30% above their long-term average at the end of 2012. In The Netherlands, Italy, Portugal, too, we expect thatfalling household incomes in addition to mortgage lending constraints will continue to depress home prices.Overview• We forecast that residential real estate prices will keep falling in most European markets this year.• Spains housing market will likely suffer the heaviest year-on-year price falls of 8%, followed by theNetherlands (5.5%) and France (5.0%).• The German market, though, should still see moderate 3% price rises, and we predict U.K. prices will also riseby 1.5% overall.• The long-term prospects for many markets are more positive, however, as affordability ratios, measuring pricesto income, gradually rebalance.Only in Germany and the U.K, are housing markets strengthening. The German residential property market is anoutlier in Europe. We forecast prices will appreciate by 3% this year and by another 3% next year, after much steeperrises in 2011 and in the first half of 2012. We nevertheless see this as normalization rather than overheating given thatGermanys housing market didnt experience the boom over recent decades that many others saw. Theprice-to-income ratio still finds the German housing market undervalued by 20%. In the U.K., supportive mortgagemeasures will help foster a house-price rise of 1.5% this year after strengthening 2.3% last year.Beyond the economic crisis, though, the prospects for most of Europes housing markets appear more positive, in ourview. A shortage of housing supply, coupled with rising demographics in the Netherlands, France, and the U.K., toname just three, should underpin prices over the longer run.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 21123007 | 301015591
  3. 3. Table 1European Nominal House Prices (% change, quarter on quarter)2009 2010 2011 2012 2013f 2014fBelgium* 1.1 5.9 2.0 1.8 0.5 1.5France (4.2) 7.7 3.7 (1.6) (5.0) (5.0)Germany 1.6 2.7 6.8 3.5 3.0 3.0Ireland (19.1) (11.0) (15.8) (6.1) (0.9) 0.0Italy* (3.4) (1.4) (2.8) (4.0) (3.0) (1.0)Netherlands (5.0) (1.0) (3.4) (7.3) (5.5) (1.0)Portugal (0.6) 1.6 (0.8) (2.7) (1.5) 0.0Spain (6.6) (3.3) (7.1) (10.5) (8.0) (5.0)U.K. 0.3 3.8 (0.5) 2.3 1.5 1.0Sources: S&P, OECD. *For these countries, 2012 nominal house prices are estimates. F--Forecast.Belgium: Growth Is Cooling As Transactions SlowGrowth in Belgiums housing market looks set slow over the coming quarters as conditions for buyers become tighter.Yet, prices and household debt are still moderate compared with the rest of Europe, which should prevent a downturn.We now forecast that prices will rise by just 0.5% this year and by 1.5% in 2014 (see table 2).Recent trends.Home prices already cooled in the fourth quarter of 2012, with growth estimated at 1.6%, below the inflation rate.Reflecting this weakness, house purchase transactions also slowed. Only 123,000 units changed hands in 2012compared with more than 128,000 in 2011, reflecting a 4.2% fall, according to Belgium Statistics (see chart 1). The fallin transactions was less marked in the Brussels region than in the rest of the country. Yet, consumer confidenceremains as depressed as during the 2008-2009 global financial crisis as austerity measures and rising unemploymentare cutting household incomes.Future trends.We expect only very little growth in house prices in nominal terms, and negative growth in real terms over the nextfew years. Factors that have underpinned prices over the past decade will become less supportive, in our view. First,we believe interest rates on loans, now at a historical low, will stabilize over the next few quarters as credit standardstighten. We also expect borrowing capacity to be less supportive. Second, lower household incomes are unlikely to beoffset by a drop in the savings rate. In past years, Belgian households and investors were able to make larger downpayments to keep up with house price increases. The average down payment on residences rose significantly from23% in 2004 to 37% of the property value in 2011. But it now seems to have reached a limit, and stabilized in 2012 atover 36%. Furthermore, a fall in transactions is most often an early sign of cooling prices. Early indications availablefor the first quarter of 2013 strongly suggest to us that the decline in transactions is gaining momentum.However, we dont believe these negatives will add up to a downturn in Belgiums housing market. Home prices andhousehold debt are still moderate compared with other countries. Whats more, the economy should start to recovergradually in the second half of 2013, taking advantage to some extent the recovery in world trade.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 31123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  4. 4. Table 2Belgian Housing Market Statistics2009 2010 2011 2012e 2013f 2014fNominal house prices (% change year on year) 1.1 5.9 2.0 1.8 0.5 1.5Real GDP (% change) (2.8) 2.4 1.8 (0.2) (0.1) 0.8CPI inflation (%) 0.0 2.3 3.5 2.6 2.0 1.5Unemployment rate 7.9 8.3 7.2 7.4 7.9 7.9Sources: S&P, Eurostat, Banque Nationale de Belgique, OECD, Statistics Belgium. e--Estimated. f--Forecast.Chart 1Sources: Statistics Belgium, ECB, Organization for Economic Co-operation and Development (OECD), National Bankof Belgium.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 41123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  5. 5. France: Home Price Declines Appear To Be Gaining MomentumWe forecast that home prices will fall by 5% both this year and again next year as France undergoes a price correctionafter decades of double-digit growth (see table 3).Recent trendsTransactions on the French residential market fell significantly in 2012 by 12% (see chart 2), although prices appearedstill to show some resilience. Data for the final quarter of last year, however, suggest the downturn in transactions isnow starting to affect prices. The solicitors federation reported that prices in the greater Paris area (Ile de France)dropped by 1.4% in the fourth quarter. Early indications for the first four months of 2013 also strongly suggest that theprice decline is gaining momentum.We believe this downturn would likely have materialized sooner had it not been for favorable financial and fiscalconditions that continued to support the housing market through most of 2012. As of February 2013, interest rates onhousing loans were still very low historically, at 3.13% on average. However, more fundamental factors haveprogressively gained the upper hand. For the first time since 1984, household purchasing power fell in 2012 by 0.2%,while unemployment rose from a year earlier. GDP growth last year was flat and indications for 2013 point to anotheryear of contraction in economic activity, by 0.2% according to our forecast, as fiscal tightening weakens domesticdemand. Meanwhile, some fiscal incentives ended during 2012, such as zero-interest rate loans for first-time buyers.Authorities also withdrew special fiscal incentives for buy-to-let investors, causing a retreat in the number ofinvestment-based transactions. According to a large private real estate company, the percentage of buy-to-let investorsamong total buyers had fallen to 12% at the start of 2013 from 22% a year ago.Future trendsThe recent price declines in France are likely not just a temporary phenomenon, but rather the harbinger of a moreprotracted correction, in our opinion. We forecast the French economy overall will stay weak this year and into nextyear. Domestic demand will continue to suffer from tight fiscal policies, and households are likely to protect theirsavings in anticipation of higher taxes over the coming 18 months. A likely continued rise in unemployment will add tooverall uncertainties. Furthermore, fundamental housing market indicators show that residential real estate in Franceremains expensive by historical standards. The affordability ratio (measuring prices to incomes) was still 30% above itslong-term average at the end of 2012. Although this indicator offers only a partial view of market conditions, we thinkit highlights that France hasnt experienced a house-price correction observed elsewhere in Europe, and particularly inthe U.K., since 2007. France is also on the brink of a demographic shift as baby-boomers approach retirement age. Thiswill likely gradually change the market balance in favor of buyers, so adding downward pressure on prices.That said, we dont expect a genuine collapse in prices. Our unchanged forecast of a 5% drop this year and again in2014, appears to us a moderate correction after years of double-digit growth. We also think low interest rates willcontinue to support prices over the next few years. A lack of attractive alternative long-term investment opportunitiesis also likely to continue to provide a degree of support to residential real estate.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 51123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  6. 6. Table 3French Housing Market Statistics2009 2010 2011 2012 2013f 2014fNominal house prices (% change year on year) (4.2) 7.7 3.7 (1.6) (5.0) (5.0)Real GDP (% change) (3.1) 1.7 1.7 (0.0) (0.2) 0.6CPI inflation (%) 0.1 1.7 2.3 2.2 1.5 1.7Unemployment rate 9.5 9.7 9.6 10.5 10.9 11.2Sources: S&P, Eurostat, OECD, INSEE. f--Forecast.Chart 2Sources: Ministère de lEcologie du Développement et de lAménagement du Territoire, ECB, OECD, INSEE (InstitutNational de la Statistique et des Etudes Economiques), ECB.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 61123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  7. 7. Germany: Rising Prices Are Still Bucking The European TrendAlthough it has lost the growth momentum it showed in 2011 and in the first half of 2012, residential real estate inGermany is still appreciating modestly. After changing the sample of properties included in its calculations, the OECDhas revised downward its previous price estimate for 2012. The market increased by 3.5% year on year last year innominal terms and by 1.8% when adjusted by inflation. Despite this revision, we maintain our forecasts for nominalprice growth of 3% this year and another 3% next year, owing to positive economic fundamentals such as a resilientlabor market (see table 4). We nevertheless see this as normalization rather than overheating given that Germanyshousing market didnt experience the boom over recent decades that many others saw.Recent trends.After recording a marked increase in the first part of 2012, housing construction growth calmed at the end of the year.Total dwelling permits rose by only 4.8% (to 239,465 units) in 2012, after nearly 22% in 2011 (see chart 3). Theexpansion of the housing supply reflects a surge in demand due to strong immigration and the attraction of theproperty market as an investment. A more flexible supply is likely to reduce house-price volatility over time.Historically low financing costs and good income prospects continued to stimulate growth in mortgage lending lastyear. Loans for housing purchases rose by 2.1% in February, which is the same rate registered in mid-2006 before thefinancial crisis.Future trends.As reflected in a recent bank lending survey that showed a perceptible tightening in credit standards for housing loans,and given banks conservative practices, we believe that house-price rises will stay contained. We expect that theBundesbank will remain vigilant and will implement effective and prudent supervision should prices become veryvolatile. Nonetheless, fundamentals continue to support a further rise in the residential market, in our view. Surveys bythe consumer researcher GFK ("Gesellschaft für Konsumforshung") point to a highly optimistic consumer climate. Thisrests not least on the positive labor market situation and strong rise in earnings. We forecast that unemployment willfall slightly to 5.7% in 2013 and to 5.6% in 2014 (see table 4). We also project that wages will continue to rise inGermany, as signaled by the wage agreements for the steel industry in March. The affordability index, measured asprice to income, also finds the German housing market undervalued by 20%. The ratio is well below the long-termaverage for the index (chart 3). The price-to-rent ratio similarly points in this direction.Table 4German Housing Market Statistics2009 2010 2011 2012 2013f 2014fNominal house prices (% change year on year) 1.6 2.7 6.8 3.5 3.0 3.0Real GDP, % change (5.08) 4.2 3.0 0.7 0.8 1.5CPI inflation (%) 0.2 1.2 2.5 2.1 1.8 1.7Unemployment rate 7.8 7.1 6.0 5.5 5.7 5.6Sources: S&P, Eurostat, OECD, Deutsche Bundesbank. e--Estimate. f--Forecast.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 71123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  8. 8. Chart 3Sources: ECB, OECD, Deutsche Bundesbank.Ireland: Starting A Long Road To RecoveryThe heavy slump in the Irish housing market appears to have bottomed out. House prices posted their firstquarter-on-quarter increase in 22 quarters in December 2012 and we forecast that prices will stabilize this year andnext, after falling 6.1% in 2012 (see table 5). But even if prices are no longer in free fall, we think a recovery is still along way off. Tight credit supply, and excess capacity suggest that prices in Ireland may recover only slowly.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 81123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  9. 9. Recent trends.Limited new construction is helping the market stabilize. New construction contracted by 19% in 2012, with only 8,488new units completed compared with 10,480 in 2011. This is well below the 2006 peak of 90,000 units, and belowpotential demand. This suggests to us that the overhang of unoccupied properties should slowly erode. Some largerconurbations where there is no large supply overhang, such as Dublin, Galway, or Cork, have even registered pricerises. Another sign of improvement was an upturn in transactions. The Property Services Regulatory Authorityindicates that transactions rose significantly in 2012, although they abated somewhat in the first quarter of 2013--theywere up 37.1% last year, but decreased by 1.1% in March 2013 year on year. This is because home buyers wanted tobenefit from the mortgage interest relief that ended on Jan. 1, 2013. Similarly, lending for house purchases increasedby 5.4% in February from the previous year (see chart 4). In particular, outstanding housing loans surged by nearly 8%in December 2012 from the previous month.Future trends.The Irish property market will likely continue to stabilize for the next two years, in our view. Price-to-income andprice-to-rent ratios have returned to their long-term average (see chart 4), indicating that prices have reached anequilibrium. Economic recovery in 2013 and 2014 should also support demand for housing. We expect real GDP torise 1.2% this year and 2.2% next year, while unemployment should slowly decline to 14.1% in 2014 from 14.9% in2012 (see table 5).Still, while momentum appears to be building in the housing market, the rate of increase in transactions and houselending this year may not exceed 2012, as mortgage interest relief has ended. Whats more, a new local property taxcoming into force later this year may also drag on the price upturn.Table 5Irish Housing Market Statistics2009 2010 2011 2012 2013f 2014fNominal house prices (% change year on year) (19.1) (11.0) (15.8) (6.1) (0.9) 0.0Real GDP (% change) (5.5) (0.8) 1.4 0.4 1.2 2.2CPI inflation (%) (1.7) (1.6) 1.1 2.1 1.7 1.8Unemployment rate 11.9 13.7 14.4 14.9 14.6 14.1Sources: S&P, Eurostat, OECD, Central Statistics Office. f--Forecast.Chart 4WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 91123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  10. 10. Sources: Property Services Regulatory Authority, ECB, OECD, Central Statistics Office Ireland.Italy: Economic Woes Are Dragging House Prices Down FurtherAfter revising our forecasts for the Italian economy downward, we anticipate that housing prices will also dip furtherthis year, by 3% (see table 6). We dont envisage any recovery before 2015.Recent trends."Agenzia del Territorio", the public agency providing cadaster-related and land registry services, revised downward itsestimates of house sales for 2012 to about 444,000 units. This is only half that of 2006, when transactions peaked. It isalso down by 26% on last year (see chart 5). This was accompanied by a 4% fall in prices last year. ContractingWWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 101123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  11. 11. household disposable incomes (-2% in nominal terms for 2012) and strained credit supply conditions are depressingdemand. The recently introduced new property tax has also likely dragged transactions and prices down. In November2012, total housing loan growth in Italy returned to negative for the first time since February 2009. In February 2013,lending for house purchase stock declined by 0.75%, despite the continuous decline in interest rates.Future trends.Demand for housing will stay depressed, in our view, given that domestic demand is likely to decline again next year,that political uncertainty is high, financial conditions tight, and the labor market deteriorating. We expect real GDPgrowth to decline by 1.4% this year, before recovering slightly in 2014 (see table 6).We nevertheless dont expect that Italys housing market will slump. The market is not as leveraged as the averagemortgage market in Europe. Outstanding mortgages were 23.4% of GDP in 2012, significantly lower than the eurozone(European Economic and Monetary Union) average of 40.4% of GDP at the same date. It therefore hasnt experiencedthe same upturn in prices as other European countries. Whats more, both price-to-rent and price-to-income ratios aretrending close to their long-run average (see chart 5). This means theres no evidence of an overvaluation of houses, inour view, that would warrant a very deep correction.Table 6Italian Housing Market Statistics2009 2010 2011 2012e 2013f 2014fNominal house prices (% change year on year) (3.4) (1.4) (2.8) (4.0) (3.0) (1.0)Real GDP, % change (5.5) 1.8 0.4 (2.2) (1.4) 0.4CPI inflation (%) 0.8 1.6 2.9 3.3 2.2 1.8Unemployment rate 7.8 8.4 8.4 10.6 12.0 12.5Sources: S&P, Eurostat, OECD, Nomisma. e--Estimated. f--Forecast.Chart 5WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 111123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  12. 12. Sources: Agenzia del Territorio, Nomisma, ECB, OECD.The Netherlands: House Prices Are Under Pressure As Consumer ConfidenceDeclinesThe Dutch housing market is still in the doldrums because a deteriorating labor market and uncertainty surroundingpensions is putting off buyers. We still forecast home price declines of 5.5% for 2013, but only a 1% decline for 2014(see table 7). Over the longer view, however, we anticipate that the economy will improve, and housing will becomemore affordable, leading to a stabilization of prices. The agreement between the government and social partners onpostponing €4.3 billion worth of spending cuts may also positively affect household incomes and consumerconfidence.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 121123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  13. 13. Recent trends.Housing transactions spiked in the fourth quarter of 2012 as many first-time buyers took advantage of moreadvantageous fiscal treatment that ended in December 2012. As of Jan. 1, 2013, new mortgage holders are obliged topay off their mortgages on an annuity basis to be eligible for mortgage interest relief. As a result, prices only declinedby 0.2% on a quarterly basis, while house sales rose by 55% in the fourth quarter of 2012. For the full year, pricesdeclined by 7.3% while transactions fell by 2.9% (see chart 8).Households have remained cautious because economic uncertainty and austerity measures are cutting theirpurchasing power. This is limiting their borrowing capacity, although interest rates on mortgages continue to slowlydecline and are at about 4.0% (see chart 6). In our view, the 7.4% increase in housing loans in February 2013 ismisleading. When including mortgage loans transferred by monetary financial institutions and special-purposevehicles, the yearly growth rate trended downward to 1.4% in that month.Future trends.We expect prices to keep falling this year because economic growth in the Netherlands will remain anemic in 2013 andunemployment will rise to 6.3%. Both the decline in purchasing power and rise in unemployment will keep householdsvery cautious. In the longer term, though, we believe prices should bottom out as the economy turns more positive.Among the more fundamental factors, supply shortage continues to worsen because construction output has for someyears been below the rate before the financial crisis. Permits for residential building fell by 35% in 2012 on the previousyear and were 60% lower than their 2006 peak. The fall in the supply of new homes, in addition to the steady increasein the number of households, should help to stabilize the market. Added to this, the price-to-income ratio isapproaching its long-term average, making houses more affordable.Table 7Dutch Housing Market Statistics2009 2010 2011 2012 2013f 2014fNominal house price (% change year on year) (5.0) (1.0) (3.4) (7.3) (5.5) (1.0)Real GDP (% change) (3.7) 1.6 1.0 (0.9) (0.5) 0.8CPI inflation (%) 1.0 0.9 2.5 2.8 2.0 1.4Unemployment rate 3.7 4.5 4.4 5.3 6.3 6.5Sources: S&P, Eurostat, Kadaster, OECD, CBS Statistics Netherlands. F--forecast.Chart 6WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 131123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  14. 14. Sources: Central Bureau of Statistics Netherlands (CBS), ECB, OECD, Kadaster.Portugal: The Market Still Sliding Despite Attempts To Revive ItThe Portuguese housing market is continuing to slide gradually as demand falters. Households are unwilling to buyhomes because consumer confidence is falling, unemployment looks set to rise to 18% this year, and earnings aredeclining. We now forecast that house prices will fall by 1.5% before stabilizing in 2014 (see table 8).Recent trends.In 2012, residential retail prices dropped by 2.7% on the previous year. Activity in Portugals residential constructionsector has continued to weaken, as shown by a 35% year-on-year decline in permits issued for residential buildings lastWWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 141123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  15. 15. year (see chart 7). Given mortgage lending constraints, loan growth continued to plunge, even though interest rates fellto historic lows of 3.28% in February 2013 (see chart 7). In the same month, total housing loans in Portugal dropped by3.6% to €109.9 billion from a year earlier (see chart 7). The bank lending survey for the first quarter of 2013 pointedagain to further tightening in mortgage lending, owing to the increasing cost of funding, balance-sheet constraints, andless favorable expectations regarding general economic activity. The decline in demand for house purchases inducedsome Portuguese banks to offer thousands of repossessed homes at reduced prices to revive demand. The Portuguesegovernment is also trying to attract foreign buyers to the countrys property market. It announced last year it wouldgrant special resident permits to non-EU citizens who invest more than €500,000 in real estate.Future trends.In spite of bank and government initiatives, we still expect that the housing market will stay depressed in the shortterm, owing to deteriorating labor market conditions, lower confidence, adjustment of permanent incomes, and tightaccess to credit. Portuguese household debt is still very high, both in historical terms and in comparison with othereurozone countries. We therefore expect it to keep declining.Nevertheless, we believe Portugals property price declines will stay relatively limited. Unlike Spain or Ireland, Portugaldoesnt have an oversupply of housing, owing to sluggish economic performance and decades of rent controls. Priceshave barely increased in real terms since the 1990s. Whats more, the price-to-rent ratio is trending downward and isnearly 12% below its long-term average. The price-to-income ratio, on the other hand, has been increasing since 2011,suggesting that incomes are falling at a more rapid pace than prices.Table 8Portuguese Housing Market Statistics2009 2010 2011 2012 2013f 2014fNominal house prices (% change year on year) (0.6) 1.6 (0.8) (2.7) (1.5) 0.0Real GDP, % change (2.9) 1.4 (1.6) (3.2) (1.5) 0.9CPI inflation (%) (0.9) 1.4 3.6 1.5 1.5 1.8Unemployment rate 10.6 12.0 12.9 16.0 18.0 15.0Source: S&P, Eurostat, BIS/private sector. f--forecast.Chart 7WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 151123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  16. 16. Source: OECD, ECB.Spain: A Glut Of Unsold Homes Will Keep The Market DepressedWe see no signs of improvement in Spains housing market given the precarious economic conditions and the heavyweight of unsold housing stock. Adding to this oversupply, Spains "bad bank" SAREB has revealed plans to sell 45,500housing units over the next five years, representing one-half of the housing stock in its portfolio. Considering the bankslarge stock--it owns about 30% of all new homes for sale--this asset liquidation will very likely determine the pace ofprice declines. Assuming SAREBs disinvestment is gradual, we forecast that house prices in Spain will fall by 8.0% thisyear and by another 5% in 2014 (see table 9).WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 161123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  17. 17. Recent trends.Home prices plunged by 10.5% in 2012 from a year earlier and have now fallen 28% from their peak in March 2008.The rapid increase in unemployment--expected to reach nearly 27% in 2013--alongside severe fiscal consolidation andtight financial market conditions are hitting households purchasing power and weakening their borrowing capacity.Whats more, high indebtedness will continue to drain funds from household budgets, leaving little room for saving.Indeed, household investments have halved over the past five years.Transactions, meanwhile, have stayed very low: 325,000 homes exchanged hands in January for the last 12 months,down by 6.4% from January last year (see chart 8). The Spanish market is still saddled with an excess supply of about680,000 units, according to the Spanish housing ministrys official estimates for 2011. The number of new homescompleted last year dropped to 133,000 from a peak of about 760,000 units in 2006, suggesting that the adjustmentprocess is still under way.Future trends.We see little opportunity for Spanish households to become much more solvent given that prices are still falling,purchasing power is declining, and interest rates are stabilizing. This should keep demand very depressed. The sizablechunk of idle housing stock will also prevent an early recovery in residential property prices. Price-to-income andprice-to-rent ratios lead us to expect a further 20% drop in housing prices over the next four years. Yet, given serialcorrelation, there could be some degree of overshooting in house prices before they return to their long-termequilibrium, in our view.Table 9Spanish Housing Market Statistics2009 2010 2011 2012 2013f 2014fNominal house prices (% change year on year) (6.6) (3.3) (7.1) (10.5) (8.0) (5.0)Real GDP (% change) (3.7) (0.3) 0.4 (1.4) (1.5) 0.6CPI inflation (%) (0.2) 2.0 3.1 2.4 2.0 1.0Unemployment rate 18.0 20.1 21.7 25.1 26.8 26.5Sources: S&P, Eurostat, Banco de Espana, OECD. F--Forecast.Chart 8WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 171123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  18. 18. Sources: Instituto Nacional de Estadistica (INE), ECB, OECD, Banco de Espana.U.K.: Mortgage Relief May Help Lift The MarketProspects for the U.K. housing market are improving, in our opinion, thanks to government mortgage relief measuresto support homebuyers, as well as tight housing supply. Yet, price-to-income ratios suggest homes are still overvalued.On balance, therefore, we forecast house prices will rise by a moderate 1.5% this year and by 1% in 2014 (see table10).WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 181123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  19. 19. Recent trends.In 2012, prices rose by 2.3% across the U.K., according to OECD estimates. Yet, this represented a 0.4% decline in realterms, when adjusted for inflation. Nationwide statistics also mask a widely divergent picture across the country.London and the south of England have seen positive house price growth over the past year, while prices haveweakened in the midlands and the north.Transactions, meanwhile, were up 4.9% in February on a last-12-months basis (see chart 9). But although sales aretrending upward, they are still 45% below 2007. Housing starts in the U.K. dropped by 11% to 98,290 units in 2012.This is well below the 233,000 new homes per year that housing experts say the U.K. needs to meet the predictedexpansion in the number of households. The gap between demand and supply will therefore continue to widen.Mortgage approvals were up slightly by 0.7% in February this year from a year ago. Yet, home mortgage lending is still40% below figures before the financial crisis. This is because mortgage providers are limiting the volume of mortgagesavailable, particularly to first-time buyers, by reducing loan-to-value ratios. That said, the Bank of Englandsfunding-for-lending scheme has made it cheaper for households that previously had access to credit to obtain loans.Future trends.We believe the governments new mortgage support measures are likely to help revive the market. The new schemeoffers buyers with a deposit of at least 5% an interest-free loan of up to 20% of the value of most new homes. A secondmeasure that targets first-time buyers consists of a government mortgage guarantee that assists buyers of homes worthup to £600,000.Strong demand for housing should also help lift the U.K. housing market over the coming years. There is unlikely to bea substantial increase in housing supply in the near term. Furthermore, government and Bank of England measures arepushing down interest rates and increasing buyer solvency.Still, the house price-to-income ratio suggests that prices 20% above their long-term average. This is why we expectthat prices will only rise moderately.Table 10U.K. Housing Market Statistics2009 2010 2011 2012 2013f 2014fNominal house prices (% change year on year) 0.3 3.8 (0.5) 2.3 1.5 1.0Real GDP (% change) (4.0) 1.8 0.9 (0.0) 0.6 1.3CPI inflation (%) 2.2 3.3 4.5 2.8 2.8 2.5Unemployment rate 7.5 7.9 8.0 8.0 8.5 8.0Sources: S&P, Eurostat, OECD, Department for Communities and Local Government. f--Forecast.Chart 9WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 191123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
  20. 20. Sources: HM Revenue & Customs, Bank of England, OECD, Department for Communities and Local Government.WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 29, 2013 201123007 | 301015591Economic Research: Recession Keeps House Prices In The Dumps In Most European Markets
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