Euro nation house prices could fall 7%

House prices in the euro-area could fall by around seven per cent in the next three and a half years if interest rates rise to swiftly, Goldman Sachs warns. 

The bank assumed a growth rate of one per cent for both disposable income and rental prices, and a rise of real bond yields and short-term interest rates to three per cent and 1.5 per cent respectively.

"Under our more pessimistic scenario, our model suggests that nominal house prices in the euro-area could fall by around seven per cent over the next three-and-a-half years," says Goldman Sachs. 

"This forecast is driven by two factors: first, the negative momentum that is caused by the faster rise in interest rates and, second, the reduction in equilibrium house prices that such a rise in interest rates leads to."

This warning is in contrast to the UK where signs of a recovery in the housing market are becoming stronger, as shown by yesterday's Land Registry report.

Spain and France at risk

The bank's analysis looked at pre-crisis gains and the level of post-2008 price adjustments to calculate which countries are most at risk if house prices see further declines, and used a model to calculate fair values by using government bond yields and rental yields and made predictions for house price growth in the monetary area.

The two most at risk economies were marked out as Spain and France, where the bigger leverage in the private sector make these economies vulnerable to declines in house prices.

"The link between the housing market and economic growth is not straightforward and depends on, amongst other things, the extent to which the private sector is leveraged to house price changes," Goldman Sachs says.

The post-crisis adjustment in house prices is still incomplete in Spain, Italy and France and poses risks to the recovery of these economies, although the bank noted that due to the relatively low leverage in the Italian housing sector the economy is less at risk than it two other peers.

House prices grew at an annual average rate of 12 per cent between 1999 and 2008, the largest pre-crisis nominal gains in Europe, but the sector has only seen a 28 per cent decline in the post-crisis adjustment period. This compares with 11 per cent pre-crisis gains in Ireland and subsequent declines of more than 50 per cent in the country's housing market.

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