The insanity of European property markets

Discussion in 'Economics' started by Ghost of Cutten, Nov 25, 2010.

  1. In Spain, a country about to undergo economic armageddon, house prices are down 22% from the peak in 2007. That is a ridiculously small amount. That would imply that prices in were at most 22% overvalued, and that no economic deterioration has taken place since then. Or that the economy has deteriorated enough to justify a 22% price fall, but that prices in 2007 weren't at all overvalued given the economic conditions of the time. Whereas obviously prices were much more than 22% overvalued in 2007, and the economic situation has deteriorated massively since then. So prices should be at least 40-50% off the peaks.

    Right now, banks have been repossessing and now own properties en masse. Given the situation in the PIGS countries, they simply cannot afford to have these assets tied up on their balance sheets. They will need to liquidate at any price to shore up their reserves. Obviously, there are far less buyers today than in a normal year for real estate. And if PIGS turmoil and spending cuts increases, which it obviously will, then demand will become even lower.

    Combine a huge increase in immediate price-insensitive supply from the banks, and a significant fall in demand from already anemic levels, and add in a ridiculously overvalued price anyway, and there is only one way that prices can go - down, down, and deeper down. Investor demand from professional landlords and bottom fishers will not enter in a serious way until you can buy a property for 10 times or less annual rental income. And rents may also fall due to economic malaise.

    This story is repeated across Europe - in Ireland, Greece, Italy, UK, Eastern Europe. Only Germany and Austria really have real estate at reasonable valuations, and they also have fairly robust economies right now (in relative terms at least).

    So, IMO the real estate market in the EU is going to get absolutely clobbered. It is mind-boggling to me that anyone would want to buy at current prices with the current fundamental outlook - but then that was true in 2007 too and it didn't stop people doing incredibly dumb things. One thing you learn in this business is that people just make dumb decisions en masse, and it goes on for years.

    All of this suggests that the EU is a giant short. Short the real estate stocks, the bank stocks, the Euro, the pound, and the government bonds in the PIGS. Only exporters and mining stocks will really benefit. This also means that the dollar is probably a huge buy, which almost no one believes right now. What it means for gold, I'm not sure - the forthcoming EU panic could cause capital flight into gold as a safe haven, or the dollar could strengthen and thus weaken gold somewhat. So I suspect gold might just trade in a wide and choppy range as the bulls & bears fight over these two competing themes. Probably best just to buy the dips, sell the rips, and accumulate a long-term position by dollar cost averaging for when gold makes its eventual big rally to $2000.
  2. Good info Cutten, thanks for the write up.
  3. Here's one article covering it:

    I am sure that story is playing out in Portugal, Greece, Ireland etc too. In the UK, the pound is trading like nothing special is going to happen. But look at the recent student riots there - and this is a bunch of spoiled overprivileged middle class kids who get virtually free university degrees, finally being asked to pay a few thousand a year towards the certificates that will boost their lifetime income by 6 or 7 figures. What is going to happen once they start cutting the salaries of police, hospital staff, firemen, tax collectors etc? In the UK property market people think that the bottom was put in during 2009. Yet rental yields still suck, price to income is still pretty high, and wages and employment are not going up - if anything they will get worse.

    It looks not so much like 1992 with the ERM, but rather an EU version of the 1998 Asia crisis could lie ahead. Whilst the US should remain relatively unaffected, you have to wonder what this will do to the PE ratios of many of the gogo stocks that are trading at elevated levels nowadays.
  4. AK100


    House prices in the UK are political don't forget and that's probably the only reason they haven't slumped.

    But if they do, and I reckon they will, then all hell could break loose as the average UK citizen believes the whole universe revolves around UK property prices.

    But the paradox of a rising property is this - look where it got the world.............
  5. I don't believe the government is controlling the market, they don't have the power or ability to do it. It's just that people hate to sell property at lower prices, and have no clue about the economic outlook - they would rather sit on a house for 3 years than face reality, and they have no idea that the reality might be economic carnage. So falling prices are more likely to occur once *forced* sales hit the market i.e. bank repossessions getting liquidated. Look at 1990 onwards - real estate in many places (including the UK) crashed in 1990, but the bottom didn't occur in many places until 1995-1998. Real estate in the UK peaked in 2007 so we could easily be waiting until 2012-2015 before a new bull market starts.

    It reminds me a bit of the crash - even in early 2001 some people were still thinking internet stocks would rebound and the bottom was in, yet there were 2 more years to go.

    Here's an example of the IMO unwise bank policies in Europe:

    They should be raising cash and deleveraging to ride out the coming storm, not expanding their exposure to other banks by making illiquid investments. Even if they are strong enough to survive the EU crisis, in the next couple of years EU bank stocks will be given away at firesale prices - much better to raise and hold on to cash now and then have the *option* of investing at bargain prices during a crisis, or horde the cash to tide themselves over during it.
  6. henry76


    House prices in the uk arn't political , they ( houses ) are in limited supply and in huge demand as england is highly populated ( especially in s.e.) and is growing due to immigration , to paraphrase an american , buy land they've stopped making it, ( unlike people , we're still makeing them ).
  7. Good post Cutten.

    Re " But look at the recent student riots there - and this is a bunch of spoiled overprivileged middle class kids who get virtually free university degrees, finally being asked to pay a few thousand a year towards the certificates that will boost their lifetime income by 6 or 7 figures."

    Cultural attitude that may be pervasive throughout, not just middle class or "kids"

    As an aside, I've been reading some history of France pre ww2 and there may be clues to market performance and attitude of the masses. If I find any correlations I'll post but for now the parallels have piqued my curiosity.
  8. m22au


    Great post GoC.

    As I've posted numerous times, the way I am expressing my view that the 'excessive debt workout won't be pretty' thesis is through my pair trade of (long gold and short S&P 500).

    Generally speaking this pair does well when there are fears of hyperinflation (high commodities prices would hurt profit margins and result in equities underperformance) and deflation (equities fall by more than gold due to insolvency fears, reduced profitability).


    However it was noticeable during Wednesday's session that the S&P 500 had a nice melt up despite the EUR/USD falling about 0.5% from its morning (New York time) peak.

    I'm considering (pending appropriate entry points) some of the following trades:

    Short EUR against GBP (relatively slow moving pair)
    Short EUR against USD or CHF (slightly riskier because EUR could rise against USD and CHF during periods of risk-seeking behaviour).

    Short $IBEX and long $DAX (or long $CAC) to capture underperformance of Spanish stocks versus German or French stocks

    Short $IBEX against long EUR/USD (to capture underperformance of Spain versus EUR).
  9. as henery76 said
    also there was the major sell-off of 'council houses' and that council houses are no
    longer built has reduced affordable housing
    and for instance while the national average Terrace house is given as £200,044 and
    my hometown: £73,173
    there are houses for sale starting at £30,000 and that's similar in other areas of the
    country. I've seen areas where whole swaths of streets/houses are flat waste lots
    and while many like new builds, they're that much more expensive than the 75 year
    old terraced houses
  10. Some reasons why parts of the European property market are holding up better then expected.

    - Governments subsidize and encourage home ownership trough a wide variety of policies. For a considerable part of the public it absolutely makes perfect sense to buy a house given the tax breaks you receive.

    - Defaulting on your loan is less acceptable then it is in the US both -morally as by law.

    - The larger social safety net provides people with the opportunity of being able to continue to pay their mortgage even after losing their job.

    - Boomers are still stuffed with cash and putting a floor under prices helping their children to buy property.

    - Quality. No wooden homes build in 2 weeks to be found.

    - If you are scared of banks crashing.. You buy gold...or a house.

    - In Western europe the shock has been less felt by the populace then say in the PIGS or the US.

    But other then that, I agree absolutely, housing is relatively to very expensive in many parts of Europe and bound to retreat should a variety of factors I mentioned come under pressure or disappear over time.
    #10     Nov 25, 2010