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Global house prices are still rising
By Scheherazade Daneshkhu, Economics Correspondent

Published: December 29 2006 16:47 | Last updated: December 29 2006 16:47

International house prices have defied rising interest rates this year, growing at more than 10 per cent in some European countries, and many analysts expect residential property to remain resilient in 2007.

The most notable growth has been in Ireland, where house prices have more than trebled since 1992 in real terms – taking into account the effects of inflation.

Annual house price growth in Ireland accelerated again this year to 15 per cent in the three months to September compared with the same quarter last year, according to the Royal Institution of Chartered Surveyors, the UK property organisation.

The hot Spanish market slowed from 13 per cent annual growth last year to a still robust 10 per cent this year. Annual house price growth in Canada, Norway and Sweden was more than 10 per cent, according to the RICS.

Even in the US, where there has been a sharp slowdown in sales and construction, house prices were still up by 7 per cent in the third quarter compared with last year, but have fallen back since. Prices have fallen in some cities, notably Detroit and Phoenix, and in Florida and some parts of California.

John Calverley, economist at American Express Bank and author of a book on asset bubbles, said: “The US is the main area of weakness – there’s a big difference in what’s happening there, where the market is essentially flat, and elsewhere, where prices are quite firm.”

He expected the US property market to remain weak but not to crash next year. “My bottom line is that, in the end, recessions cause house price crashes rather than the reverse. One day we’ll have a recession and that will cause house prices to decline but I don’t expect a recession next year.”

US house prices have doubled in the past 10 years.

With the exception of Germany and Japan, advanced countries have been in the grip of a housing boom since the mid-1990s. The Organisation for Economic Co-operation and Development described the boom as unprecedented in its steepness, durability and geographical breadth.

Earlier this year the OECD identified overvalued housing markets and rising long-term interest rates as among the greatest risks to advanced economies.

It was more sanguine in the economic outlook it released last month, though the industrialised world’s think-tank did downgrade its forecast for US economic growth because of the slowdown in housing.

Most economists attribute the weakening of the US housing market to higher interest rates. The Federal Reserve has more than doubled its main interest rate in quarter-point steps since the beginning of last year to 5.25 per cent from 2.25 per cent in January 2005.

Milan Khatri, chief economist of the RICS, said the strength of the global economy had helped housing markets, in spite of monetary tightening in Europe and the US.

“There are signs of an acceleration of growth in Europe, which is a key positive for the housing activity,” Mr Khatri said.

“As people’s incomes go up, they want to upgrade their houses. Rising interest rates are a negative but they have been going up at a slow pace.”

In the UK house price inflation sped up again this year to an annual 10 per cent in December, after slowing to 3 per cent in 2005. The acceleration came in spite of two rate increases by the Bank of England this year, to 5 per cent in November.

The European Central Bank has put up its main rate six times since December 2005, to 3.5 per cent from 2 per cent. Yet house prices in Ireland and Spain, two property markets singled out a year ago by the OECD as overvalued, continued to rise at double-digit rates.

Countries where the property market has cooled include France, Italy and Portugal. Germany remains weak though there are signs that prices have stabilised. In Japan, commercial property prices in Tokyo have started to rise but the market beyond is still weak.

Jean-Michel Six, chief economist for Europe at Standard & Poor’s rating agency, believes European housing markets will follow the US in slowing next year. In a note published last month, he wrote: “This particular party may well be coming to an end. Rising interest rates, coupled with current high levels of household debt, are likely to check house price inflation.”