1 Graph to Put Europe in Perspective
Aug 16th 2012 4:09PM
Updated Aug 24th 2012 1:20PM
Come on, Europe! Can't you just fix yourself already? So say the Americans, but while the U.S. is now seeing rising housing prices in some areas (knock on wood), the bottom may have yet to fall out of a few European housing markets. And just like in Japan in 1990 and America in 2008, markets do not perform well when home values collapse. But before all of the specifics, take this chart in:
The above chart plots out home price indices that measure the relative value of houses. Using 2001 as the base year, France and U.S. housing took the same trajectory upward until 2006. Spain soared even higher than both of them! In the U.S., you might recall that this was the period when kids in your neighborhood flipped houses instead of running a lemonade stand. As evidenced in Michael Lewis' The Big Short, a nanny owned six townhouses in Queens, and "a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000." No question these practices were unsustainable, and thus, demand and prices for homes fell in the U.S.
However, unlike the U.S., French housing more than doubled in value by the end of 2007 -- a little more than six years. Now, if the population doubled, or France experienced dramatic inflation, or wages doubled, this run-up in prices might make sense. But the population growth in France is about 0.5%. Inflation in France during this period was mostly under 2% per year. Household incomes are up only 35% since 1998. Is France -- the second largest European economy by GDP -- going to have a similar housing crash as the U.S.?
Predictions range for a slide in prices from 12% to 15% by the end of next year, to 40% over five to 10 years. If the French housing index matched U.S. growth since 2001, it would have to fall by more than 70%. Demographics won't save France either -- as reported by The Telegraph, the consultancy PrimeView states: "Those younger than 58 are net buyers of property, those older are net sellers. The buyers stay constant at 33m, while the sellers rise by 1.2m every five years for a quarter century."
Just in case the bubble wouldn't pop itself, politicians also put a new 15% tax on foreign owners of second homes, which will also help cool demand.
And unlike Americans, who hold 27% of household wealth in real estate, the French have a whopping 57% tied up in housing. Remember the big story on how American wealth fell 40% between 2007 and 2010? The French could be looking at a much bigger cliff.
The upside is that the French did not dabble in such subprime loans as the Americans did. French regulators recommend that banks shouldn't issue mortgages if payments will be greater than 33% of a borrower's income, and as The Economist reports, "banks are under a legal obligation not to push borrowers into more debt than they can manage, and cases are regularly brought to court."
This has left French banks like BNP Paribas (OTC: BNPQY.PK) in a better position than American counterparts during tough times. The bank recently announced an almost 9% Tier 1 ratio, a measure of good to risky assets, putting it ahead of its competitors. But even with regulations, bubbles can still fly high and wreak havoc on their way down.
Housing in Spain has already lost more than 25% of its value from its high in 2007. Amazingly, properties in Spain doubled in value in a little less than five years, from 2001 to the end of 2005. As Fool Sean Williams pointed out in April, home prices would need to fall another 30% just to be in line with Spanish wage growth over the past 15 years. Will housing be Spain's final nail in its already-sealed coffin?
It certainly doesn't help that Spaniards hold 80% of their assets in real estate. And for Spain's housing index to come in line with U.S. growth since 2001, it would have to drop 47% more. With a lack of employment and falling home prices vaporizing citizens' largest asset, it's no wonder that mortgages that back bonds managed by JPMorgan Chase (NYSE: JPM ) , Barclays (NYSE: BCS ) , Banco Bilbao Vizcaya Argentaria (NYSE: BBVA ) , and Banco Santander (NYSE: SAN ) , among others, have delinquency rates creeping higher every quarter. While the bonds only total 2.6 billion euros, they can give a hint of the underlying weakness of the total mortgage market. The cumulative delinquency rate for all mortgages backing the bonds is now higher than 15%. For a scary comparison, the delinquency rate in the U.S. peaked at 10.1% in 2010.
Take shelter at home
The rise in housing indices of Spain and France could be well-deserved, and there is no guarantee that just because they've outpaced the U.S., they must come back in line with the U.S. After all, these are three very different countries. However, it does seem that, based on the evidence, prices are somewhat inflated. And as these prices fall -- and the largest portion of household wealth in France and Spain deteriorates -- consumers in these countries will find it harder to pay bills and buy cars, iPhones, and leather handbags.
Luckily, the U.S. remains a relatively safe place to invest. And banks in the U.S., while beaten up, could offer some great returns. For one bank that shakes its head at the riskier moves that put its rivals in trouble, take a look at our free report: "The Only Big Bank Built to Last."