Bubbling Over
A booming real estate market has kept the global economy humming over the past few years. But, with markets stagnating in Australia and Britain, and cooling down in the United States, many economists are now predicting that it is a matter of when, not if, the bubble will burst. European countries should be particularly scared ...
A booming real estate market has kept the global economy humming over the past few years. But, with markets stagnating in Australia and Britain, and cooling down in the United States, many economists are now predicting that it is a matter of when, not if, the bubble will burst.
A booming real estate market has kept the global economy humming over the past few years. But, with markets stagnating in Australia and Britain, and cooling down in the United States, many economists are now predicting that it is a matter of when, not if, the bubble will burst.
European countries should be particularly scared of a looming crash. Why? Because the 12 eurozone economies have relinquished the macroeconomic tools that governments need to deal with this type of crisis to the European Central Bank (ECB). Stripped of monetary control, a weakened eurozone member cannot devalue its currency or cut interest rates and so would have no choice but to bust its budgets with aggressive government spending or tax cuts. "The downside is very big if something were to go wrong," says Dan O’Brien of the Economist Intelligence Unit. "There would be no easy way out."
The specter of economic impotence looms largest for the smaller economies of Europe. The ECB must set one interest rate for all 12 countries. Invariably, the rate will benefit Europe’s largest economies, leaving the little ones to fend for themselves. Currently, two of Europe’s fastest-growing economies — Ireland and Spain — require higher interest rates to stop their housing markets from overheating. In Spain, interest rates on mortgages are almost zero when accounting for inflation. Yet, the ECB can’t raise rates because the zone’s two largest economies — France and Germany — need lower interest rates to spur growth.
Property prices in Ireland and Spain have increased by 208 and 150 percent since 1997, respectively. In Barcelona, an average three-bedroom condo in the trendy Eixample district goes for nearly $1 million. Last December, the Organisation for Economic Co-operation and Development estimated that real estate in Ireland and Spain is overvalued by 15 and 13 percent. The Economist believes the figures are even higher, at 23 and 26 percent, respectively. If their housing markets fall too far too fast, they could take both economies down with them.
For now, Ireland and Spain can do little but hope their go-go real estate markets come in for a soft landing. Says Fernando Fernández Méndez de Andés, the former chief economist for Santander Central Hispano, Spain’s largest bank, "How do we unwind the housing bubble without blowing it up?"
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