European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst

- Excerpt GEAB N°20 (December 16, 2007)-

European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst
If you were a subscriber to the GEAB, you would have read what will follows as early as December 16th, 2007:

Before anticipating into detail housing market evolutions in these three European regions, we would like to drag our readers’ attention to the fact that the evolution of the main international currencies directly influences some of these markets. For instance, a large part of real estate in Eastern Europe is financed upon bank loans in Swiss Francs; meanwhile in Israel (1), the characteristic of the estate market is a major move away from the US dollar towards the national currency, the Shekel. Well paradoxically, it is for the same reason that Israeli operators are getting away from the US dollar and that the housing bubble will burst in a number of Central and Eastern European countries in the coming months, and that reason is the general loss of confidence in the US currency and the consequences this has on the foreign exchange market.

Before describing the situation in new EU member-states, let’s examine the evolution of two Western European markets which LEAP/E2020 predicted were about to decline, i.e. Spain and UK.


In Spain, the situation is clearly catastrophic recording up to 50% drops in home starts over one year and inventories of unsold homes jumping from 16.4 to 24.5 months on a national scale (2). Compared to 2006, the collapse is even more perceptible as projections for 2008 anticipate about 300,000 home starts while they anticipated more than 900,000 in 2006, corresponding to a 70% drop.

The economic consequences of this collapse of the Spanish real estate market are desastrous. The entire estate and building industry is stricken (3). Spanish media are full of stories about estate agents not selling anything for months, or building companies whose work is frozen due to promotor insolvency. 75% of the 60,000 Spanish real estate agencies are expected to fail in 2008 (4).

House prices in Spain (March 2006 – March 2007) – Source Spanish Ministry of Housing
House prices in Spain (March 2006 – March 2007) – Source Spanish Ministry of Housing
If, as anticipated by LEAP/E2020, 2007 was the year when the real estate bubble burst in Spain, 2008 will be for sure the year when a major economic and financial crisis soars throughout the country. All the declarations repeated by the Central Bank of Spain and the country’s major banks on the fact that this crisis has nothing in common with the US subprime crisis, are nothing but the normal soothing stance delivered whenever serious crises are ahead (all the more when they occur in a context of global credit crunch). And international investors are not fooled as illustrated by the fact that BBVA (Spain’s second largest bank) was unable to sell more than a quarter of a EUR 6.6 billion emission of mortgage-backed securities. As second most indebted country in the world (behind the US, see GEAB N°17) and with banks who fuelled to the last limit the housing bubble now bursting, Spain is ready to step into a severe social and economic crisis in 2008, according to our researchers. The collapse of the real estate market will go on and the country’s economy is heading towards a recession, in a context of national banking crisis strengthened by the international situation. This will be a decisive test, a life size one, for the leaders of the Eurozone.

United Kingdom

House prices in UK – Source Halifax
House prices in UK – Source Halifax
In the UK, the situation’s components are rather different though the direction is the same as in Spain. The British real estate market reversed in 2007 and the impact of the global financial crisis on the City (layoffs, end of super bonuses…) swept away the last factor that maintained under pressure the London and South-East markets. Today the City itself warns of 10% slump in British home prices in 2008 (5).

Difficulties to refinance millions-worth of adjustable-rate mortgages due to increased interest rates on the one hand (6) and to credit crunch on the other, provide another reason for the British real estate market to weaken when close to one third of the borrowers will probably be unable to refinance their mortgage (7) (and thus be compelled to sell or be seized) (8).

According to our team, in 2008, the British real estate market will keep on slumping, and the trend should accelerate in the middle of the year as the global financial crisis will intensify, thus hitting harder on the City.

Central and Eastern Europe

Eastern Europe: Percentage of home loans in foreign currencies – June 2006 / Source BNP Paribas
Eastern Europe: Percentage of home loans in foreign currencies – June 2006 / Source BNP Paribas
In Central and Eastern Europe, the situation is different because these economies are in a process of rapid development, having recently joined the EU and preparing to join the Euro within the next 3 to 4 years. And it is a matter of currencies that will drag some of these countries into housing bubble bursts in 2008.

Indeed, in the past years, Hungarian, Romanian, Bulgarian and Baltic banks specialised in foreign currency-denominated loans (Euros, Dollars and Swiss Francs) with a view to soften the effects of high national interest rates and unreliable national currencies. In various countries of the region, in particular Hungary (9), Romania (10) and Bulgaria (11), Swiss Franc-denominated mortgages proliferated due to particularly cheap Swiss interest rates (12). Such strategies can only be sustainable when the foreign exchange market is stable, namely exchange among the main currencies (Euro, Dollar and Swiss Franc in this case) as well as interest rates. But on both aspects, the end of the year 2007 (and our anticipations for 2008) show that it is not the case and that it will not be the case next year. Not to mention the return of inflation in Europe and the US, interest rates of the states owning the main international currencies will converge in 2008 (Switzerland included). As to the Swiss Franc, it will recover its status (and value) of blue chip currency, as always in times of great uncertainty.

The most astonishing thing is that new EU member-states (and behind them, the ECB in the end) failed to urge their banks to halt this type of denomination in Euros; indeed it is on the Euro that their economic and financial future is based, not on the Swiss Franc.

In any event, according to LEAP/E2020, this absurd situation will painfully end up for the concerned countries. The real estate market of a large part of the region will start slumping in 2008, after the past few year’s price spiralling. One more, as in the case of the other real estate bubbles worldwide, financiers’ “inventiveness” and the absence of control over central banks combine to create a crisis (13)… all the more saddening that a break took place mid-2007; unfortunately the dangerous practice was back at the end of 2007 (14).


(1) For decades, the Israeli real estate market has been based on the US dollar as benchmark currency. US-Israel ties, the US dollar’s status of international reserve currency and the important flows (human and financial ones) between the two countries justified this situation until 2007. But 2007 saw the beginning of a major move out of the US dollar on the part of Israeli real estate operators (sale and rent). Strongly backed by the Central Bank of Israel, this evolution is so important that the amount of renting contracts labelled in US dollar fell from 85% in January 2007 to 68% in October 2007. This tendency drastically strengthened in the past few months and reall estate professionals now predict that all contracts will be labelled in Shekel by the end of 2008. Source: Jerusalem Post, 12/13/2007

(2) With peaks in certain regions such as Costa del Sol, where inventories rose from 19.3 to 35.9 months. Source: Invertia, 12/13/2007

(3) For instance, the brick industry has stopped by lack of clients as in the case of the Bailen Jaen company, which represents 30% of the Spanish market. Source: Cienladrillos, 12/06/2007.

(4) Source: El Nuevo Herald, 12/15/2007

(5) Source: The Independent, 12/09/2007

(6) The Bank of England recently lowered its interest rates but too late: massive credit restrictions entailed by the global “credit crunch” will cancel the effects.

(7) Source: International Herald Tribune, 12/11/2007

(8) Source: Telegraph, 12/06/2007

(9) Generally speaking, Hungary, together with Latvia as described by LEAP/E2020 in GEAB N°16, borrows without caring about the consequences, probably expecting the Eurozone to cope with the problem. Source: Rosemanblog, 10/11/2007

(10) Source: Standard, 11/21/2007

(11) Source: The Sofia Echo, 06/25/2007

(12) Source: Bonobo Land, 11/05/2007

(13) As always, these very banks claim that there is no reason to worry. Source: Reuters, 10/17/2007

(14) Source: Hungary Economy Watch, 12/05/2007

Mardi 1 Avril 2008
LEAP / E2020
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GEAB N°90 - Contents

- Published on December 15, 2014 -

Global systemic crisis 2015 – Oil, currencies, finance, societies, the Middle East : Massive storm in the Western port!

. « Global systemic crisis: the end of the West we have known since 1945 »
. The oil crisis is systemic because it is linked to the end of the all-oil era
. The US in one hell of a state
. Europe post-Ukraine: lots of questions
. Three missions for the new Europe: resolve the Ukrainian crisis, put Euro-Russian relations back on the right path, avoid a European QE
. Middle East: traditional alliances’ big waltz
. Saudi Arabia, Iran: the allies change sides
. And Western « values » in all this
Read the public announcement

2015 – new phase of the crisis: the oil systemic crisis

. The impact of speculation
. Price War
. Systemic oil crisis and finance
. Systemic oil crisis and geopolitics

Investments, trends and recommendations

. Oil: beware!
. Energy intensive industries like airline companies
. Renewable energy: the good and the bad
. 2015: Euro & Yen rebound
. Gold: still safe

Evaluation of our anticipations for 2014
(from GEAB N° 81 in January 2014): a 69% success rate