The UK and Spain led the field in terms of house price developments, with prices climbing by 83 % and 72 % respectively from early 2001 to the end of 2004. But a host of other countries also saw substantial increases. A new report released by the economists at Allianz Group and Dresdner Bank comes to the conclusion that price trends in the USA, the UK, France and Spain have departed significantly from historic patterns, flagging up overvaluation. The markets in Canada and Sweden are also high although not overvalued. With valuations below the fair level, the Netherlands stands alone.
Industrial Countries: Housing market adjustment might prove awkward
It is striking that the recent strong expansion in construction activity in all the countries under review (with the exception of the Netherlands) has failed to curb prices. The economists fear this could give rise to persistent surplus housing capacity, possibly preventing an orderly adjustment of relative valuations via rising rents. This raises the specter of a substantial knock to the economy, should adjustment occur via a drop in house prices. An econometric analysis demonstrates that the more pronounced the overvaluation and the higher the proportion of homeowners in the economy is, the greater the economic risks. In addition, the risks are magnified by certain institutional factors such as the option to convert house price increases into higher mortgages (mortgage equity withdrawal).
David F. Milleker
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