As the U.S. real-estate crash worsens, thoughts in Europe are turning to how bad the housing markets might get in Spain, Ireland and the U.K., where booms are also deflating fast.
Don't panic. While the go-go days are probably over, there's little evidence yet that the return of some semblance of sanity to European property prices imperils the outlook for growth in the same way as the U.S. meltdown might crimp the world's biggest economy.
There are certainly some worrying signs of weakness in Europe. Mortgage arrears, or delinquencies, are climbing, based on an analysis of the third-quarter performance of European mortgage-backed bonds by credit-rating company Fitch Inc.
Arrears in Spain, for example, surged almost 31 percent in the third quarter from the previous three months, although the overall percentage of borrowers at least three months behind in their payments is still low at 0.34 percent.
``The highest arrears are being seen in transactions from 2006, backed by high loan-to-value loans from specialist lenders,'' Fitch said. ``More recent vintages are expected to see higher arrears and defaults in future.''
The U.K. market saw the second-biggest jump in arrears, with late payments on so-called non-conforming mortgages -- those with non-standard characteristics, similar to Alternative-A loans in the U.S. -- jumping 7.7 percent. Arrears rose 4.9 percent in Italy, 2.7 percent in Ireland, and 2.4 percent in Germany.
``In all jurisdictions, the effects of central bank interest-rate rises are being seen through increased arrears levels,'' Fitch said. The European Central Bank's benchmark rate has doubled to 4 percent in the past two years, while the Bank of England raised its key rate to 5.75 percent from 4.5 percent in the same period.
In Spain, the euro region's fourth-biggest economy, prices are still rising, though at a third of the rate seen two years ago. House values climbed 5.3 percent in the third quarter from the second, down from an average gain of almost 11 percent in 2006 and below the 15.5 percent increase in the first quarter of 2005, the earliest period for which figures are available.
Even a ``cautious'' analysis suggests prices are overvalued by about 30 percent, according to a Deutsche Bank AG study published last week by London-based economist Susana Garcia- Cervero and Madrid-based analyst Daniel Gandoy Lopez.
Fixed-rate mortgages account for less than 1 percent of the Spanish market, the report said. Most home loans are tied to 12- month euro money market rates, which have surged to about 4.6 percent currently, from 3.85 percent a year ago and less than 2 percent in mid-2003.
``We calculate that even under very conservative assumptions, from 2007 the economy could face a cumulative loss of almost 7 percent of gross domestic product,'' the Deutsche Bank authors wrote. Construction accounts for about 11 percent of the Spanish economy. Still, a recession in Spain is ``a rather unlikely scenario in the next 18 months,'' they said.
In Ireland, house prices dropped 1.9 percent in August and 0.7 percent in July, the first declines in at least 10 years, halting a boom that saw values climb 9.5 percent in February, 7.4 percent in March and 5.1 percent in April. Mortgage lending, meantime, grew an annual 16.1 percent in September, the slowest pace in a decade.
``The notion that Irish housing activity is in the throes of a serious slowdown which will cause a large drop in employment in the construction sector with adverse consequences for growth in the wider economy is now virtually an article of faith,'' Dermot O'Brien, chief economist at NCB Stockbrokers in Dublin, wrote in a research report last month.
Ireland's unemployment rate ticked higher, to 4.7 percent, in September from an average of 4.6 percent in the second quarter, leaving it well below its 20-year average of 9.4 percent and in line with its five-year average of 4.5 percent. Construction accounts for about 12 percent of the economy, with new housing contributing about 6.5 percent.
A collapse in the construction industry would suggest the labor market should have had a much faster pace of job losses, O'Brien wrote. ``The scenario in which a lower level of housing activity punches a big hole in the Irish growth story is untenable,'' he wrote.
In the U.K., figures showed house prices falling for the first time in two years last month. Research group Hometrack Ltd. said this week that the average cost of a home in England and Wales declined 0.1 percent from September.
The drop, though, mostly reflects waning demand in central London, where banking bonuses have driven prices sky-high in recent years. The Council for Mortgage Lenders predicts U.K. prices will still grow next year, albeit by just 1 percent compared with 7 percent this year.
``Ireland and Spain will take the most significant direct hits, while the U.K.'s more diversified economy, which is currently experiencing a less stark moderation in house-price and construction-sector growth, should weather the storm to a greater degree,'' Trevor Cullinan, a sovereign credit analyst at Standard & Poor's in London, wrote in a report last month.
The word ``decoupling'' will be bandied about a lot in the coming months as economists debate the implications of a U.S. slowdown for the rest of the world. In Europe, at least, the outlook for the housing market doesn't threaten to invoke the ghost of recession, no matter how bad the U.S. story gets.