PARIS (MNI) – Eurozone housing prices have turned the corner this
year after last year’s slump and are likely to continue to recover
gradually on average, with marked divergences across countries, the
European Central Bank said Thursday.

Comparing prices to rents suggests that price levels are “still
relatively high” for the Eurozone as a whole, again with country
contrasts that are widening, the ECB said in its December Monthly
Bulletin.

After an annual contraction of close to 3% last year, prices were
overall 0.3% higher on the year in 1Q and 1.8% higher in 2Q. While
available annual comparisons for 3Q suggest some convergence, the spread
remained wide, ranging from annual increases of 8.6% in France and 7.8%
in Finland to annual declines of 4.3% in Greece and 14.8% in Ireland.
Latest available results for Spain show a 1.0% annual decline in 2Q.

“Recent trends in house prices have been characterized by a
contracting housing supply and muted demand developments,” the central
bank noted.

Credit hurdles have come down and “housing affordability” — the
ratio of disposable incomes to house prices — has recovered since the
end of 2007, despite a slight decline in the first half of this year due
to rising prices. Since the start of last year, average mortgage rates
have fallen from over 5% to around 4%, approaching the trough in 2006.

On the supply side, the annual contraction in real housing
investment narrowed to 4% in 2Q from 12% in 1Q 2009.

Indicators for construction production in 3Q “point to weak
prospects for residential investment and to a high degree of
heterogeneity across euro area countries,” the ECB said. “However,
building permits, which are often used as a leading indicator for
housing investment a few months ahead, tentatively suggest improved
prospects for residential investment.”

Without passing judgement on the appropriate valuation of houses,
the central bank noted simply that the price-rent ratio remains
“somewhat elevated” compared to a decade ago, despite the decline since
2008.

Those looking for the next asset bubble will note that the
housing-rent ratios are highest in France — roughly 75% above the level
in 1999 and climbing — and in Spain, where they are up some 57% but
falling. In Germany, the same ratio has slid by more than 10% over the
past decade.

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