The List: Europe’s Most Inflated Real Estate Markets

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Britain

Housing boom: +113.7 percent from 1996-2006

Bubble factor: +38.8 percent

Mortgage debt-to-GDP ratio: 82.8 percent

Whats happening: Since 2000, the average house price in Britain has doubledand then some. But incomes havent risen by nearly the same amount, which means that more Britons who buy homes are taking on ever more debt. Rising interest rates have threatened to pushed many British families to default on their mortgages, a risk underscored by the recent troubles of Northern Rock, Britains fifth-largest mortgage lender. Facing an old-fashioned bank run, Northern Rock has turned to the Bank of England to guarantee its deposits. Only time will tell, however, if the stiff upper lips of Britains central bankers is enough to contain the broader threat the mortgage crisis poses to the economy.

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Spain

Housing boom: +132.7 percent from 1996-2006

Bubble factor: +45.0 percent

Mortgage debt-to-GDP ratio: 56.1 percent

Whats happening: In 2006, more homes were built in Spain than in Britain, France, and Germany put together. A housing slump would be unthinkable, the presidents economic advisor recently told Bloomberg News. Nonetheless, Spains decade-long real estate boom, during which the average home nearly tripled in price, may already be unwinding. Home prices were still rising as of the second quarter of 2007, but at the smallest rate in more than three years. Gonzalo Bernardos, an economics professor at the University of Barcelona, expects prices to drop by 20 percent by 2009. And with interest rates rising in Europe, Spains indebted homeownersmore than 90 percent of whom hold variable-rate loanscould find themselves in trouble. With its economy growing at a robust 3.7 percent clip, Spain may be spared a major crisis, however.

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Sweden

Housing boom: +131.2 percent from 1996-2006

Bubble factor: +53.7 percent

Mortgage debt-to-GDP ratio: 41.3 percent

Whats happening: Swedes hold painful memories of the housing crash of the early 1990s, when home prices fell over 25 percent following a boom in the 1980s. Today, however, the Swedish economy remains strong, growing faster than the eurozone as a whole at 3.7 percent. Home prices have continued to rise, although the deputy governor of Swedens central Riksbank recently said, [W]e do not think that residential property in Sweden is significantly overpriced in general. (Tell that to folks living in central Stockholm, where about $8,000 will buy you one square meter.) He added, however, that there are still reasons for us to be concerned by the rise in property prices and household indebtedness. Like elsewhere in Europe, Swedes are taking on debt faster than their incomes are rising. On September 7, the bank raised interest rates in an effort to keep inflation below the 2 percent target, an action that could cool the real estate market. Referring to the global credit crunch, the Riksbank acknowledged at the time, It is reasonable to assume that this will have some negative consequences for growth abroad and in Sweden. Swedens monetary stewards are determined to engineer a soft landing, and the safe bet is that they will pull it offprovided, of course, that the international economy doesnt disrupt their careful plans.

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Belgium

Housing boom: +90.1 percent from 1996-2006

Bubble factor: +53.3 percent

Mortgage debt-to-GDP ratio: 34.2 percent

Whats happening: Belgians are in the grips of half-serious speculation that the country may split in two between its Flemish- and French-speaking sections, so the housing boom is hardly the talk of Brussels at the moment. Perhaps its also because, if any country is likely to weather the subprime mortgage storm, its Belgium. The countrys banks are famously conservative in their lending practices, and Belgians are less indebted than many of their European peers. Still, low interest rates and reduced transaction costs have made it easier for more Belgians to purchase houses, pushing up prices faster than the rate of income growth. Then, a tax amnesty in 2004 led to a rush to buy second homes. In 2005, the International Monetary Funds Belgium chief predicted, [O]ver time in the next few years, we are likely to see a decline in the rate at which house prices are increasing, and that might reduce a little bit growth, but otherwise, we think that the risks are confined and we don’t see any major consequences on household consumption. So far, so good.

Note: All housing data via a July 2007 study by Morgan Stanley researchers David K. Miles and Vladimir C. Pillonca, Financial Innovation and European Housing and Mortgage Markets.

The bubble factor refers to an indicator Morgan Stanleys researchers call the contribution of estimated change in expected capital gains to 10 year house price growth. In other words, it measures the extent to which expectations contribute to rising housing pricespossibly leading to a bubble. For more information, see the Morgan Stanley study.

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