The New York Times
April 14, 2008
Housing Woes in U.S. Spread Around Globe
By MARK LANDLER
DUBLIN -- The collapse of the housing bubble in the United States is
mutating into a global phenomenon, with real estate prices swooning from
the
Irish countryside and the Spanish coast to Baltic sea****ts and even parts
of
northern India.
This synchronized global slowdown, which has become increasingly stark in
recent months, is hobbling economic growth worldwide, affecting not just
homes but jobs as well.
In Ireland, Spain, Britain and elsewhere, housing markets that soared over
the last decade are falling back to earth. Property analysts predict that
some countries, like this one, will face an even more wrenching adjustment
than that of the United States, including the possibility that the
downturn
could become a wholesale collapse.
To some extent, the world¹s problems are a result of American contagion.
As
home financing and credit tightens in response to the crisis that began in
the subprime mortgage market, analysts worry that other countries could
suffer the mortgage defaults and foreclosures that have afflicted
California, Florida and other states.
Citing the reverberations of the American housing bust and credit squeeze,
the International Monetary Fund last Wednesday cut its forecast for global
economic growth this year and warned that the malaise could extend into
2009.
³The problems in the U.S. are being transmitted to Europe,² said Michael
Ball, professor of urban and property economics at the University of
Reading
in Britain, who studies housing prices. ³What¹s happening now is an awful
lot more grief than we expected.²
For countries like Ireland, where prices were even more inflated than in
the
United States, it has been a painful education, as homeowners learn the
American vocabulary of misery.
³We know we¹re already in negative equity,² said Emma Linnane, a
31-year-old
university administrator.
She bought a cozy, one-bedroom apartment in the Dublin suburbs with her
fiancé, Paul Colgan, in May 2006, at the peak of the market. They paid
$575,000 ‹ at least $100,000 more than it would fetch today. ³I sometimes
get ****vers thinking about it,² Ms. Linnane said, ³but I¹ll let the
reality
hit me when I go to sell it.²
That reality is spreading. Once-sizzling housing markets in Eastern Europe
and the Baltic states are cooling rapidly, as nervous Western Europeans
stop
buying investment properties in Warsaw, Tallinn, Estonia and other real
estate Klondikes.
Further east, in India and southern China, prices are no longer surging.
With stock markets down sharply after reaching heady levels, people do not
have as much cash to buy property. Sales of apartments in Hong Kong, a
normally hyperactive market, have slowed recently, with prices for
mass-market flats starting to drop.
In New Delhi and other parts of northern India, prices have fallen 20
percent over the last year. Sanjay Dutt, an executive director in the
Mumbai
office of Cushman & Wakefield, the real estate firm, describes it as an
erosion of confidence.
Much of the retrenchment seems to be following the basic law of gravity:
what goes up must come down. With low interest rates helping to inflate
housing bubbles in many countries, economists said the confluence of
falling
prices was predictable, if unsettling.
This is not the first housing downturn to cross borders, but its
reverberations have been amplified by the integration of financial
markets.
When faulty American mortgages end up on the books of European banks, the
problems of the United States aggravate the world¹s problems.
Consider Britain, which had one of Europe¹s most robust housing markets,
with less of an oversupply than in Ireland or Spain. Then last summer came
the subprime crisis across the Atlantic.
Within two months, mortgage approvals dropped 31 percent, compared with
the
previous year. And by March, average housing prices had fallen 2.5
percent,
the largest monthly decline since 1992.
³The boom in house prices was actually much bigger here than in the U.S.,²
said Kelvin Davidson, an economist at Capital Economics in London. ³If
anything, people should be more worried than in the U.S.²
Britain has one of the most developed home-financing industries, not far
behind that of the United States. The amount of outstanding mortgage debt,
as a share of total economic output, is higher there than in the United
States, according to a study by the International Monetary Fund.
³The U.K. followed the U.S. into never-never land, pu****ng mortgages out
the
door, believing that prices would go up forever,² said Allan Saunderson,
the
managing editor of Property Finance Europe, a newsletter for investors.
Still, the problems in Britain pale next to those of Spain and Ireland.
Residential investment accounts for 12 percent of the Irish economy and 9
percent of the Spanish economy, compared with 5 percent in Britain and 4
percent in the United States, according to the I.M.F.
The glut of housing has brought new construction to a standstill, driving
up
unemployment and dimming the prospects for two of Europe¹s stellar
performers over the last decade.
³We¹re waking up from the property dream and finding ourselves in a
situation where prices are falling in Spain for the first time,² said
Fernando Encinar, a founder of Idealista.com, a real estate Web site.
In Spain, more than four million homes were built in the last decade, more
than in Germany, Britain and France combined. Average house prices tripled
in parts of the country, as Spain¹s torrid economy attracted immigrants
and
Northern Europeans snapped up holiday homes along the Costa del Sol.
Now, though, thousands of those houses stand empty. The I.M.F. estimates
that property is overvalued by more than 15 percent. With mortgages drying
up and prices swooning, speculators who once viewed Spanish property as a
no-lose proposition are confronting hard reality.
In 2005, Julian Felipe Fernandez bought three small apartments, as an
investment, in a huge development being built outside Madrid. He paid
100,000 euros as a deposit for the units, and now he is eager to sell them
to avoid having to taking on a costly mortgage. But with the market
stalled,
Mr. Fernandez¹s asking price is what he paid for them.
³Three years ago, it looked like I would be able to flip them for a nice
profit before they were finished,² he said. ³I just want to get them off
my
hands, to get rid of this headache.²
If he unloads them, he will be lucky. Enric Bueno, head of marketing for
Ibusa, a real estate company in Barcelona, said his firm was closing six
or
seven sales a month, compared with 40 a month a year ago.
³Things are really bad,² Mr. Bueno said. ³If this goes on for five years,
we
won¹t make it.²
Economists have been busy cutting their growth forecasts for Spain, with a
few saying that it may stagnate this summer. BBVA, a leading Spanish bank,
forecasts that unemployment will rise to an average of 11 percent this
year,
from 8.6 percent in 2007.
Such cutbacks are well under way in Ireland, where the taxi drivers
complain
that their ranks are being swollen by laid-off home builders. The housing
collapse has brought an abrupt end to more than a decade of pell-mell
growth
that earned Ireland the nickname ³the Celtic tiger.²
Today, the mood in this country feels like a wake, and not an Irish one.
Average house prices fell 7 percent last year, the most in Europe,
according
to the Royal Institution of Chartered Surveyors, a British real estate
group. They are likely to fall by a similar amount this year.
After a 16-year boom that was interrupted only briefly after the Sept. 11
terrorist attacks, Ireland has the most overvalued housing market among
developed countries, according to the I.M.F. In its recent economic
outlook,
the fund calculated that prices are 30 percent higher than they should be,
given Ireland¹s economic fundamentals.
For many Irish, accepting that reality is like passing through the seven
stages of grief. Some homeowners are still in denial, brokers said, asking
$5 million for houses worth no more than $4 million. But developers have
begun cutting prices for smaller apartments like the one owned by Emma
Linnane.
³Last year was our Œwake up in the middle of the night with sweat pouring
down your face¹ period,² said David Bewley, a director at the Lisney real
estate agency. ³Now we¹ve grown up.²
Not all the omens are negative. Mr. Bewley said houses were selling again,
albeit for 25 percent less. Ireland has not yet suffered widespread
incidences of defaulting mortgages or foreclosures in this downturn, in
part
because lenders have not been as aggressive as those in the United States.
But some worry that the housing meltdown could spoil Ireland¹s recipe for
success. Like Spain, it attracted lots of foreign workers, many of whom
came
for well-paying jobs in the construction industry. That fueled the Irish
rental market, which has remained buoyant and been a source of income for
Ireland¹s many real estate speculators.
³If the immigrants go back home, will this hurt the rental market?² asked
Ronan O¹Driscoll, a director in the Dublin office of Savills, a real
estate
firm. ³If that happens, it would definitely cause foreclosures.²
Re****ting was contributed by Victoria Burnett in Madrid, Eamon Quinn in
Dublin, Heather Timmons in New Delhi and Julia Werdigier in London.
http://www.nytimes.com/2008/04/14/business/worldbusiness/14real.html
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