rapporto sul mercato immobiliare europeo standard&poor

Economic Research:

Europe's Housing Markets May Be OnA Slow Path To Recovery

Credit Market Services:

Sophie Tahiri, Economist, Paris 33 1 44 20 67 88; [email protected]

Jean-Michel Six, EMEA Chief Economist, Paris (33) 1-4420-6705;

[email protected]

Table Of Contents

Belgium's Housing Market Is Positive, But Obstacles May Lie Ahead

In France, Very Low Interest Rates Keep The Market Fairly Resilient

German House Prices Still Rising, But More Modestly

Ireland Is Seeing A Two-Speed House-Price Recovery

Italy's Residential Property Market Remains Weak

The Slump In The Netherlands Is Over, But A Recovery Will Be Muted

Portugal's Housing Market May Start To Stabilize This Year

Spain's House Price Slowdown Is Easing But It Is Not Yet In Recovery

The U.K. Housing Market Is In Recovery Mode

Related Criteria And Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 22, 2014 1

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Economic Research:

Europe's Housing Markets May Be On A SlowPath To Recovery

House prices in many European markets may start to stabilize this year amid slowly improving economic conditions.

Yet, a recovery is still a long way off for those housing markets worst hit by the downturn, such as Spain and the

Netherlands, amid oversupply and still tight credit conditions. Only the U.K. housing market is staging a strong

recovery, while German house prices look set to stay buoyant this year, as their economies are performing better than

the European average.

In Spain, which has experienced among the heaviest housing slumps, we believe the price slide will decelerate this

year on the back of improving economic conditions and rising demand from international investors. We've moderated

our forecast for 2014 to just a 2% decline, after an estimated 5% fall in 2013. But continuing oversupply will cap any

recovery. Ireland's housing market is also performing better than we previously expected, with prices rising an

estimated 6% in 2013 and by a forecast 3.5% this year. Yet, we expect the revival momentum will weaken thereafter

owing to still tight lending and high mortgage arrears.

Overview

• Gradually improving economic conditions should help to stabilize or revive many of Europe's housing markets

this year.

• We forecast more modest price declines in 2014 than last year for Spain (-2%) and Italy (-1%), price

improvements for Ireland (up 3.5%) and Portugal (0.5%), and zero growth for the Netherlands.

• Bright spots include the U.K., where we forecast 5% house price growth this year, and Germany with 4%.

House price falls in the Netherlands are also slowing. After falling an estimated 4.5% for 2013, we forecast zero growth

this year and a 2% year-on-year rise for 2015. Yet, the significant number of residential properties on sale, and

household debt that is the highest in the eurozone (European Economic And Monetary Union) will also dampen any

stronger market recovery, in our view.

The U.K. housing market, however, is staging an impressive revival. Boosted by government incentives, a strong

economic upturn, and very low interest rates, nominal house prices rose by 4% in 2013 and we forecast they will

continue to expand by 5% on average both this year and next. Our forecast takes into account increasingly tight

mortgage affordability standards by the Bank of England to head off signs that the market may overheat.

Germany's housing market also continues to appreciate. We expect residential real estate prices to have risen 5% in

2013, and forecast further rises of 4.0% and 3.5% this year and next, on the back of positive income and job

developments, low interest rates, and relatively low price-to-income ratios.

We expect prices in France will continue to fall this year by 3%, but that they will rise again in 2015 by 2%, driven


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above all by a shortage of housing supply.

Table 1

European Housing Market Nominal House Price Forecasts

(% change year on year) 2009 2010 2011 2012 2013f 2014f 2015f

Belgium 1.1 5.9 2.0 1.5 2.0 1.5 1.5

France (4.2) 7.6 3.8 (2.1) (2.0) (3.0) 2.0

Germany 1.5 2.9 6.8 3.6 5.0 4.0 3.5

Ireland (19.1) (11.1) (15.9) (6.1) 6.0 3.5 2.0

Italy (3.4) 0.2 0.4 (5.2) (5.0) (1.0) 1.0

Netherlands (5.0) (1.0) (3.4) (7.3) (4.5) 0.0 2.0

Portugal (0.6) 1.6 (0.8) (2.7) (3.0) 0.5 1.0

Spain (6.6) (3.3) (7.1) (10.5) (5.0) (2.0) 0.0

United Kingdom 0.3 3.8 (0.5) 2.3 4.0 5.0 5.0

f--Forecast. Sources: S&P, OECD.

Belgium's Housing Market Is Positive, But Obstacles May Lie Ahead

Weak economic conditions in 2013, leading to an estimated 0.1% contraction of real GDP, haven't held back growth in

Belgium's housing market. Residential property prices rose by 2.5% in the third quarter of 2013 after increasing 2.8% in

the second quarter. We expect house prices to have continued to expand by a significant 2.0% for the full year 2013

(see table 2) on the back of historically low interest rates and supportive tax policies. We nevertheless forecast

house-price growth will slow to 1.5% for both 2014 and 2015 if, as we expect, interest rates gradually rise. Added to

this, house purchases are among the least affordable in the eurozone in terms of prices to incomes.

Recent trends

National statistics indicate that house purchase transactions picked up in the third quarter of 2013 on a quarterly basis

(see chart 1): 120,764 units changed hands in the 12 months to September, against 119,959 in the 12 months to June

2013, representing a 0.7% rise. On a yearly basis, however, the number of house sales continued to fall by 5.6%. The

drop in transactions was less marked in the Brussels region (-0.1% year on year) than in the rest of the country (-6.0%

in the Flemish region and -3.9% in Wallonia).

Bank of Belgium data indicate that gross lending for house purchases also weakened by 14.3% in the 12 months to

September 2013, after an annual decline of 14.1% in August. The average mortgage loan amount fell to €135,172 in

September 2013 from €136,130 in June. In contrast with still weak credit and transaction statistics, the average price

for a home has continued to increase, rising 2.5% year on year to €223,221 after an increase of the same magnitude in

June.

Several factors explain the Belgian housing market's resilience, in our opinion. First, although interest rates on housing

loans rose slightly, they remain historically low, averaging 3.5% in October, according to European Central Bank (ECB)

data. Domestic banks have remained very cautious in their lending practices. Between 1996 and 2013, the

loan-to-value ratio has never exceeded 82% and has been on a declining path. As a result, Belgian household debt

remains well below the eurozone average of 55.6% of GDP compared with 64.3% in June 2013. Second, the Belgian


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Economic Research: Europe's Housing Markets May Be On A Slow Path To Recovery

market's housing supply-and-demand balance indicates the country has no supply overhang. While the number of

households expanded by about 40,000 a year between 2005 and 2009, construction of new dwellings, including

secondary residences, has averaged 47,000 per year. Between 2010 and 2013, 195,000 new dwellings were built.

Therefore, if the number of households continued to grow by 40,000 per year, the number of dwellings constructed

(160,000) should cover households' needs. These numbers are nevertheless for the country as a whole, and the

Brussels region continues to report some supply shortages.

Further supporting the resilience of Belgium's housing market are supportive tax policies that have encouraged home

buying. We believe the tax amnesty the government introduced in 2005 and extended through Dec. 31, 2013, has

encouraged Belgian households to repatriate funds and reinvest them in residential property, which we think has

helped support house price increases. Evidence suggests that large down payments have helped households keep up

with price increases. In 2004 the average price for a standard house was equivalent to the average mortgage loan

amount, at approximately €101,000. By the first half of 2013, the difference between the value of the property and the

loan had increased as much as €60,000.

Future trends

Following the expiry of the tax amnesty at the end of 2013, we believe house prices in Belgium could face downward

pressures. An improvement in the domestic economy could nevertheless offset this weakness and extend price rises

into this year and 2015, although the magnitude of the increase would likely be less significant.

We believe economic conditions in general will become more supportive of home-price increases if Belgium's GDP

rises by 0.8% this year, as we expect, followed by a more robust increase in 2015 of 1.5%. Real disposable income

should also rise on the back of lower inflation and a stabilization of the labor market.

Still, it remains to be seen how much of additional price increases potential buyers will be able to absorb. Like many

other European countries, Belgium experienced a house-price boom in the two decades leading up to the onset of the

financial crisis in 2008. Unlike many of those countries, however, the ensuing price correction was little more than a

blip. Home prices fell by just 1.2% in the first two quarters of 2009 before resuming their upward trend. A high

affordability ratio may also put a lid on price increases. The ratio of house prices to income suggests that homes are

still among the least affordable in the Economic Monetary Union (EMU). The affordability ratio continued to increase

and was 50% above its long-term average in June 2013. Similarly, the price-to-rent ratio indicates an overvaluation of

62%. Furthermore, we expect that long-term interest rates could increase gradually in both 2014 and 2015, which

could put additional downward pressure on prices. As a result, we forecast house price growth will slow to 1.5% this

year and next, from 2.0% in 2013.

Table 2

Belgian Housing Market Statistics

(%) 2009 2010 2011 2012 2013f 2014f 2015f

Nominal house price change year on year 1.1 5.9 2.0 1.5 2.0 1.5 1.5

Real GDP, % change (2.8) 2.3 1.8 (0.1) (0.1) 0.8 1.5

CPI inflation 0.0 2.3 3.3 2.6 1.2 1.3 1.5

Unemployment rate 7.8 8.2 7.2 7.6 8.6 8.7 8.3

f--Forecast. Sources: S&P, Eurostat, Banque Nationale de Belgique, OECD, Statistics Belgium


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In France, Very Low Interest Rates Keep The Market Fairly Resilient

A shortage of housing supply in France should help to soften a slowdown in prices this year. We expect that house

prices will contract by 3% this year, representing a still modest correction on the vast rise in prices in the decade to

2007. We forecast prices will then stabilize in 2015, rising by 2% year on year (see table 3). A sharper than expected

rise in long-term interest rates would precipitate a steeper price decline, but we view this as rather unlikely at this

stage.

Recent trends

French housing prices continued on a modestly downward path through 2013. The latest read from INSEE, the French

statistical office, points to a 1.5% decline in the third quarter from a year earlier. The number of transactions fell by

22% from its early 2012 peak through June 2013, but has since then showed signs of a revival. Housing loans were up

4% in the 12 months to October (see chart 3). Those indicators suggest that the market is experiencing a modest


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correction after its spectacular rise of 155% between 1997 and 2007. The French market remains fairly unique in the

eurozone in that the economic downturn of the past five years has hardly improved the market affordability ratio. The

average price for a dwelling was equivalent to 3.8 years of income in November, which is still very close to its 2007

peak.

Several factors explain this situation. The market continues to suffer from a lack of supply. In 2013 as a whole, about

335,000 new homes will have been completed, representing a 10-year low, although the economic authorities' goal

was to raise the number of new homes by 500,000. France currently has 33.3 million dwellings, of which 2.4 million are

unoccupied. Given the population totals 64.6 million, this translates to an average 2.08 people per dwelling. However,

INSEE estimates the population is growing by 464,000 a year, generating a need for an additional 223,000 dwellings

per year. Added to this, sociological changes, such as an increasing divorce rate, are creating a need for an additional

229,000 dwellings per year. In total 452,000 new dwellings are needed every year. The gap between supply and

demand will thus continue to widen. This is especially the case in the most attractive areas of the country, such as

Provence-Cote d'Azur and in the main economic centers. In the greater Paris area, only about 35,000 new dwellings

per year are created, representing one-half of that needed to balance demand.

In the face of a still tight and expensive market, buyers have taken advantage of very low interest rates. Borrowing

rates averaged 3.11% in November 2013, which is close to all-time lows. Since the early part of the previous decade,

the rise in house prices has no longer reflected the rise in household incomes. Between 2000 and 2010, the average

price per square meter in Paris rose by 147%, while disposable incomes increased by just 33%. As a result, household

debt associated with house purchases has doubled over the same period from 33% to 66% of disposable incomes.

Future trends

We now forecast house prices will fall by 3% in 2014, compared with -4% in our previous forecast (see "Europe's

Home Price Declines Continue, But Stabilization May Be Around The Corner," published Oct. 31, 2013, on

RatingsDirect) Two key factors continue to underpin house prices and contain the price slide, in our view. The first is a

structural supply deficit. This is unlikely to go away any time soon. As noted above, the production of new homes

remains insufficient, and the latest data on construction permits gives no grounds for optimism. They were down by

15% in the 12 months to October 2013. The second factor is cheap housing loans that are to some extent offsetting the

continued deterioration in the market affordability ratio. This factor, however, may not last as long. We expect that

long-term interest rates will increase gradually. Of course, lenders will be able to smooth this increase to make it less of

a deterrent for potential borrowers. But continued weakness in the French economy this year could bring additional

downward pressure on prices. We forecast French GDP will rise by a modest 0.6% this year and by 1.4% in 2015, and

that the unemployment rate will rise in 2014 (see table 3).

Table 3

French Housing Market Statistics

(%) 2009 2010 2011 2012 2013f 2014f 2015f

Nominal house prices, % change year on year (4.2) 7.6 3.8 (2.1) (2.0) (3.0) 2.0

Real GDP, % change (3.1) 1.7 2.0 0.0 0.2 0.6 1.4

CPI inflation 0.1 1.7 2.3 2.2 1.0 1.4 1.3



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Table 3

French Housing Market Statistics (cont.)

f--Forecast. Sources: S&P, Eurostat, OECD, INSEE.

German House Prices Still Rising, But More Modestly

Residential real estate will continue to appreciate in Germany over the next two years, in our view. Favorable

economic fundamentals, such as good income and job developments combined with loose financial conditions and

relatively low prices should continue to fuel the market rebound. We have slightly lifted our estimate for 2013 price

rises to 5% from 4% in last quarterly report. However, we still expect house price growth to decelerate slightly over the

next two years to 4.0% in 2014 and 3.5% for 2015 (see table 4). While the German economy is expected to strengthen,

higher returns on alternative investments will make real estate investment in Germany less attractive, in our view.


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Recent trends

House prices in Germany as a whole increased by 3.8% year on year in the third quarter of 2013, according to the

Association of German Pfandbrief Banks, bringing the total increase to 9.4% over the past three years. Bundesbank

quarterly statistics indicate that apartment prices have climbed much faster in Germany's seven largest cities--Berlin,

Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich, and Stuttgart. In these cities, prices rose by 9.4% year on

year in September and by 29% over the past three years.

Housing construction continues to increase markedly, owing to the perceptible pick-up in demand in the housing

market. Total permits for dwellings climbed 10.3% in September, bringing the number delivered to 263,491 units over

the past 12 months, the highest level since 2006 (see chart 3).

Numerous factors are driving the surge in demand and consequent expansion of housing supply, in our view. The

German economy continued to outperform its peers in 2013, with GDP growth estimated at 0.5% compared to -0.6%

for the eurozone on average. Persistently good German income and job developments are solidly underpinning private

consumption and consumer confidence. High immigration is also supporting demand for housing, mainly in the largest

cities. Net migration to Germany (the difference between immigration and emigration), was 370,000 in 2012 compared

with an average of 130,000 between 2000 and 2007. Loose financial conditions, including still very low interest rates,

have also bolstered demand for housing. Real estate investments in Germany appear to be an attractive investment.

With the real-estate market in several European countries still in the doldrums, the German property market, which

had been stagnant for many years, is becoming more attractive to international investors. The German property

market has gained 3.0% per year in the past three years and 9% per year in the largest cities. On the supply side, the

dwellings overhang has been eroded between 1994 and 2010, following the post-reunification exuberance and

oversupply. Limited supply is also driving up prices: Just 263,000 permits were delivered in September, 60% down

from the 700,000 permits delivered in the peak year of 1994.

Future trends

For Germany as a whole, the recent upward movement in real estate prices has been quite modest compared with

historical house price increases in the 1970s and at the end of the 1980s, and compared with many other European

countries in the decade leading to the financial crisis. Nevertheless, the Bundesbank in a recent report again warned

that prices are potentially overvalued by up to 20% in some large German cities. It also indicated, however, that there

is "no substantial overvaluation of the German residential property market as a whole". Despite the beginnings of

regional excess, a bubble seems unlikely, in our view. We note that the econometric model developed by the

Bundesbank only includes longer-term demographic and economic determinants and doesn't take into account the

current loose financial conditions. Yet, household borrowing capacity has been one key factor explaining price rises.

Besides, housing-loan growth has so far been very modest and has even decelerated in recent months, reducing the

prospect of a credit-fueled bubble. Home purchase loans rose only by 2.3% in October 2013, after gaining 2.4% in

September and 2.5% in August, reflecting tightening lending standards. Over the longer term, we don't expect a

housing bubble to form. It is still more favorable to rent than to buy property in Germany. High capital requirements

limit the desire for home ownership, while fiscal incentives continue to favor the rental market. Furthermore, we

believe if tangible signs of a froth in the housing market were to appear, regulatory authorities and the government

would intervene to curb house price inflation.


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We expect that house prices in Germany will continue to appreciate over the coming years, although at a more modest

pace than in 2013. In a context of limited supply, demand for housing is likely to remain elevated. Higher net

immigration and higher household borrowing capacity, as reflected by relatively low interest rates and income

increases, should also underpin prices. We anticipate that economic prospects for the economy will continue to

develop positively, which should boost households' confidence and their willingness to make major purchases. We

forecast that real GDP will grow by 1.8% next year and by 1.7% in 2015, and that unemployment will fall to 5.1% in

2015 (see table 4).

While financial conditions are likely to remain supportive until 2015, we forecast a gradual rise in German long-term

interest rates to 2.8% in 2015 (see chart 3). As uncertainty related to the eurozone debt crisis continues to slowly

recede, growth in the larger economies pick up, and the U.S. continues to taper its quantitative easing, investment

outside of Germany is likely to become more attractive and raise investor interest in other financial assets. We forecast

that this will drive growth in house prices down to 4.0% in 2014 and 3.5% in 2015.

Table 4

German Housing Market Statistics

(%) 2009 2010 2011 2012 2013f 2014f 2015f

Nominal house prices, % change year on year 1.5 2.9 6.8 3.6 5.0 4.0 3.5

Real GDP, % change (5.08) 4.0 3.3 0.7 0.5 1.8 1.7

CPI inflation (%) 0.2 1.2 2.5 2.1 1.6 1.5 1.7


f--Forecast. Sources: S&P, Eurostat, OECD, Deutsche Bundesbank.


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Ireland Is Seeing A Two-Speed House-Price Recovery

House prices have started to rise strongly again since June 2013 after a slump that reduced prices by 50% over the

previous six years. However, the recovery in prices has been at two speeds. Prices in Dublin, the capital, are now

19.2% higher from their low point, while prices elsewhere in the country were still experiencing annual declines in

November. An improving domestic economy and some supply shortages in urban areas have placed upward pressure

on prices. In our previous housing report published last October, we underestimated the extent of the two-speed

recovery due to limited supply in the Dublin area. We have therefore modified our estimate for housing market price

rises in 2013 from 0.0% to 6.0% (see table 5). We have also lifted our forecasts for 2014 to 3.5% (from 1% in our

October report). However, we don't expect the housing market revival will stay as strong beyond 2014. Bank lending

conditions remain tight and high mortgage arrears will maintain downward pressure on house prices, in our view. We

therefore forecast that house prices will rise by just 2% in 2015.


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Recent trends

Outside Dublin, residential property prices have continued to decline since June 2013, although at a slower pace than

previously. Prices fell by 0.6% year on year in November after losing 0.3% in October, but they are 3.5% higher than

their trough in March. In the capital, meanwhile, prices increased by 13.8% in November year on year after gaining

15% in October, and are 19.2% up from their low point. As a result, house prices nationally rose by 5.6% year on year

in November. Data from other sources reveal a similar two-speed recovery although the magnitude of the price

changes may differ.

Reflecting the upward momentum in the housing market, the Property Services Regulatory Authority indicates that

transactions were up 6.8% for the country as a whole in the three months to November. Transactions are still below

par, however, estimated at 24,000 for 2013 (or 1.2% of the housing stock).

Nevertheless, leading indicators of construction activity suggest a pickup. The number of new house guarantee

registrations, which largely reflect developer activity, has doubled nationally for the first 11 months of the year, an

increase to 1,217 units. The improving property market picture is still not evident in housing completions' data. As of

November, the total number of completions stood at 7,425, 3.1% lower than in the same period of last year. This is an

unprecedented low point. Completions before the housing boom averaged 20,000-25,000 units per year and 70,000

units per year during the boom years.

Future trends

The improvement in the economy and the labor market, and limited supply in areas of Dublin will help support the

residential property market in 2014, in our view. Ireland's economy grew more than expected in the third quarter. GDP

expanded 1.5% quarter on quarter and we estimate that it will have stabilized for the whole year. For 2014, we forecast

GDP growth will gradually pick up to 1.5%, and by to 2.2% for 2015. Improving labor market conditions should lead to

a modest increase in households' disposable incomes.

In an improving domestic economy and home supply shortages in the Dublin region will likely put pressure on prices,

leading to rises nationally. A recent study published by the Central Bank of Ireland on the stock of vacant dwellings

showed that in certain areas where supply has become tight and the vacancy rate low, some increase in demand has

placed upward pressure on prices. Between 2006 and 2011, the number of households increased by 13.1% in Dublin

and in some commuter counties. Vacancy rates declined by 5.4% over the same period. These areas are now

experiencing the strongest rate of house-price growth. Given the unprecedentedly low completions over recent years,

supply is unlikely to change significantly in the short term, suggesting a continued increase in prices for 2014.

We nevertheless don't expect the recent strong increase in house prices to stay as strong beyond 2014. This is, first of

all, because the government has a medium-term economic strategy to address the "over-correction" in the

construction sector and help increase activity in that sector. This should limit supply shortages over the medium term.

Second, financing conditions remain difficult and mortgage lending low. The latest data from the Central Bank of

Ireland indicate that lending for house purchases declined by 4.2% year on year in October after falling by the same

amount in September. According to Sherry FitzGerald, a real estate agent, 54% of all transactions were bought with

cash in the first nine months of the year, highlighting that households still face difficult lending conditions. The extent

of mortgage repayment difficulties will likely to put pressure on mortgage lenders and households. Mortgages in


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arrears for more than 90 days on principal dwelling houses continued to rise to €18.6 billion or 17% of the total

outstanding balance at end-June 2013. The Central Bank of Ireland's revised code of conduct for mortgage arrears,

among other measures, should make it easier for banks to repossess homes. It also provides incentives for banks to

resolve troubled mortgages more quickly. The U.S. experience of dealing with delinquent mortgage debt suggests that

debt writedowns and repossessions are an effective way to help housing markets recover.

Table 5

Irish Housing Market Statistics

(%) 2009 2010 2011 2012 2013f 2014f 2015f

Nominal house prices, % change y/y (19.1) (11.1) (15.9) (6.1) 6.0 3.5 2.0

Real GDP, % change (6.4) (1.1) 2.2 0.2 0.0 1.5 2.2

CPI inflation (%) (1.7) (1.6) 1.1 2.0 1.2 1.8 2.0


f--forecast. Sources: S&P, Eurostat, OECD, Central Statistics Office.


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Italy's Residential Property Market Remains Weak

Italy's residential housing market continued to contract during the second quarter of 2013, owing to the weak domestic

economy and persistent pressures on credit. Assuming a modest strengthening of the economy, we maintain our

estimate that house prices will have declined by 5% in 2013 (see table 6). However, our forecasts for 2014 are more

optimistic that they were three months ago. We now expect prices to decline by 1.0% in 2014 (compared with -2% in

our previous forecast) and to rise by 1.0% in 2015 (0.0% in our last forecast). We nevertheless see further downside

risks, particularly from increased volatility in the sovereign debt markets.

Recent trends

Home sales fell by about 1.2% during the third quarter of 2013, after declining 2.6% in the second and 3.5% in the first

quarter, suggesting some signs of stabilization. The residential property market nonetheless remains weak. The rate of

sales is still approximately only half that of the 2007 peak, according to the Revenue Agency's Real Estate Market

Observatory (see chart 5). Meanwhile, house prices continue to decline, albeit at a slower pace. Prices fell by 1.1%

quarter on quarter and by 5.9% year on year during the second quarter of 2013. This followed declines of 1.4% quarter

on quarter and 6.1% year on year during the first quarter.

This downturn in the residential property market reflects the weakness in the domestic economy as well as persistent

pressures on the credit market, in our view. The unemployment rate rose to 10.7% in 2012 from 8.4% in 2011, and

continued to climb in 2013 to 12.5% in October. Household real disposable incomes fell by 1.3% in the second quarter

of 2013 compared with a year earlier, bringing the fall in household real income to 7.2% in three years, according to

ISTAT, the Italian statistical office. Emigration has also stemmed housing demand. High youth unemployment above

40.4% in October, the highest ratio in two decades, has encouraged more Italians to leave the country in search of

employment.

Lending conditions to households also remain difficult, although early indications show some signs of easing. Net

lending for house purchases was down 1.1% year on year in October as the household sector continues to deleverage.

However, the most recent bank lending survey indicates that tightening lending standards for mortgages to households

has come to a halt on the back of less unfavorable prospects for the housing market.

Future trends

Assuming a modest strengthening of the economy, we expect that the contraction in house prices will ease in the

course of 2014. We expect real GDP to rise by 0.4% in 2014 and 0.9% in 2015, while the unemployment rate is

forecast to gradually decline but to remain as high as 12% in 2015 (see table 6). Further ahead, easing fiscal pressures

should also help ease the pace of decline of house prices. Italy's government has agreed to abolish the housing tax

IMU (Imposta Municipale Unica) from the start of 2014. Former Prime Minister Mario Monti introduced the IMU in

December 2011, at a time when expectations of more levies would likely have pushed prices and transactions further

down.

Further supporting an ease in house price declines, the real estate market itself does not show signs of significant

overvaluation. The price-to-income ratio, which provides a good indicator of how affordable the market is, has come

down markedly from its 2009 peak and is now close to its long-term average. Similarly, the price-to-rent ratio remains


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at its historical average.

Provided that more benign sovereign financing conditions persist, the contraction in lending to households should also

ease, owing both to gradually expanding demand and a relaxation of supply constraints. We still see some further

downside risks, however. In particular, missed budget deficit targets, continuing rising public debt, or political

instability could again trigger a new phase of increased volatility in the sovereign debt markets, accompanied by a

spike in sovereign bond yields. Even though mortgages classified as bad debt remain low despite a 12% contraction in

prices since 2008, the deterioration of the quality of loans to construction firms amounted to €38 billion last June, or

20% of the total, according to the Central Bank of Italy.

Table 6

Italian Housing Market Statistics

(%) 2009 2010 2011 2012 2013f 2014f 2015f

Nominal house prices, % change year on year (3.4) 0.2 0.4 (5.2) (5.0) (1.0) 1.0

Real GDP, % change (5.5) 1.7 0.5 (2.5) (1.8) 0.4 0.9

CPI inflation 0.8 1.6 2.9 3.3 1.4 1.3 1.2


f--Forecast. Sources: S&P, Eurostat, OECD, Nomisma.


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The Slump In The Netherlands Is Over, But A Recovery Will Be Muted

Improving economic conditions, greater fiscal policy certainty, and increased affordability of housing seems to have

halted the slump in the Netherlands' housing market. As prices continue to decline on a yearly basis, we maintain our

estimate that prices will fall by 4.5% for 2013. We don't foresee much of a recovery this year or next given that

domestic demand should remain sluggish in 2014-2015, the significant number of residential properties on sale, and

credit constraints. We therefore expect house prices to stabilize in the course of this year before rising slightly by 2.0%

in 2015 (see table 7).

Recent trends

Dutch house prices rose 0.4% in the third quarter, bringing the first quarterly increase in three years, according to

Statistics Netherlands. On an annual basis, however, house prices continued to fall, although at a decelerated pace, by

4.5% in the third quarter year on year compared to -8.5% in the second quarter. Latest data indicate an annual decline


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of 4.7% in November, suggesting that the housing market pickup remains slow. Nevertheless, transactions over the

past five months rose by 20% from the same period last year. Still, the 94,631 home sales in the first 11 months of 2013

still 5.3% lower than the same period of 2012 (see chart 6).

The recovery in house prices in the third quarter of the year reinforce views that the Dutch economy is slowly

recovering. The economy returned to growth in the third quarter, albeit by a marginal 0.1% quarter on quarter. The

unemployment rate has also stabilized in recent months to 6.9% of the active population in November from 7.0% in

October 2013. Other indicators also point to a more positive economic stance, including improvements in consumer

confidence and the Economic Sentiment Indicator. Also underpinning the house-price rebound is the increased

affordability of homes. While house prices had tumbled 20% since 2008, the price-to-rent ratio was meanwhile only 5%

above its long-term average in June 2013, owing to adjustments in rental regulation that has caused rents to rise. The

price-to-income ratio has also declined since 2008, but remains 23% above its long-term average (see chart 6). A

structural deficit of supply as well as cheap housing loans are to a certain extent preventing the continued

deterioration in the market affordability ratio.

Future trends

We don't think that the quarterly increase in third-quarter 2013 heralds a strong recovery of the Dutch residential

property market. We expect the economy is expected to remain on a slow recovery path in 2014 and 2015, with real

GDP expanding by 0.2% in 2014 and 1.1% in 2015. Meanwhile, unemployment should continue to rise in the course of

2014, averaging 8.0%, before declining next year to 7.5% (see table 7). Domestic demand should also remain weak,

because households are likely to increase their savings' rate to repay their debt. The Netherlands' household debt ratio

is the highest in the eurozone at 127% of GDP. This ratio has only just started to decline since 2012 from a peak of

128.7% in September 2012.

While changes to mortgage interest rate deductibility as of Jan. 1, 2013, accelerated home price declines at the

beginning of the year, its effect seems to have faded. Over the long-term, fiscal modification should make housing a

less attractive investment for households. Also limiting a price recovery is that the number of house sales remains high

(although on a declining path), at 212,000 in December 2013 compared with 121,000 in September 2008, according to

the house-hunting website HuizenZoeker.nl. Negative equity is preventing most vendors from putting their homes up

for sale at realistic prices. This is in spite of recent fiscal policy measures, which make interest paid over residual debt

deductible for 10 years. Credit constraints and banking sector reform will also likely limit the recovery. The Dutch

authorities want to gradually lower maximum loan-to-value ratios to 100% in 2018, at a rate of 1% per year. The latest

National Central Bank data indicate that lending for house purchases was still weak in October 2013. Domestic banks'

housing loans expanded by just 0.9%, when adjusted for securitization. Low demand and still tight credit standards are

limiting credit growth.

Table 7

Dutch Housing Market Statistics

2009 2010 2011 2012 2013f 2014f 2015f

Nominal house prices, % change year on year (5.0) (1.0) (3.4) (7.3) (4.5) 0.0 2.0

Real GDP, % change (3.7) 1.5 0.9 (1.2) (1.2) 0.2 1.1

CPI inflation (%) 1.0 0.9 2.5 2.8 2.6 1.5 1.5


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Table 7

Dutch Housing Market Statistics (cont.)


f--Forecast. Sources: S&P, Eurostat, Kadaster, OECD, CBS Statistics Netherlands.

Portugal's Housing Market May Start To Stabilize This Year

Improvements in Portugal's real estate sales market have not yet filtered through to house prices, which continued to

fall in 2013. We expect prices will start to stabilize in the course of 2014 on the back of improving economic conditions

and still moderate house prices in the past. We nevertheless expect that the extent of the recovery will remain limited,

owing to still weak domestic demand and tight credit conditions. We forecast that house prices will have contracted by

3.0% in 2013, a heavier decline than in the past four years (see table 8). However, we have slightly lifted our forecasts

for the coming two years, to 0.5% in 2014 (from 0.0% in our October 2013 report) and 1.0% in 2015 (from 0.5% in our

previous forecast).


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Recent trends

House prices continued to contract during the third quarter of 2013 by 0.8% quarter on quarter after a 0.5% decline in

the second quarter. However, more recent indicators show an improvement in sales' market activity. The RICS

Portuguese Housing market survey indicates that transactions are beginning to pick up. This heralds better economic

conditions, even if property prices don't yet mirror this trend.

The Portuguese economy expanded in third-quarter 2013 for the second successive quarter. Forward-looking

indicators have improved significantly since the start of 2013, illustrating rising business and consumer confidence

about the economic outlook. Nevertheless, the economy still faces several headwinds. Domestic demand remains

under pressure from high unemployment and high private debt. Unemployment is likely to continue to rise to 17% this

year from 15.9% in 2012. In a difficult labor market, jobless consumers are reducing their spending, and wage growth

is moderating. Despite the recent correction, total household debt in Portugal remains high by European standards, at

89% of GDP at the start of 2013 (compared with 64% for the eurozone as a whole). Households continue to reduce

their debt by repaying existing loans. Total debt has declined by 9% or €15 billion since the peak in September 2010.

Tight credit supply conditions continue to prevail, also affecting household investment in housing. Housing loans have

declined steadily since the end of 2011 (see chart 7), while the proportion of nonperforming mortgage loans as a

percentage of total loans kept rising, hitting 2.3% as of October 2013, according to Portugal's Central Bank.

Future trends

We forecast that Portugal's real GDP will experience a very mild recovery of 0.5% growth in 2014, before rising 1.6%

in 2015. Against this backdrop, we expect the real estate market to stabilize over the coming two years. However,

price rises will likely be limited. We expect households to remain under pressure. Consumer spending is likely to

contract by 1% in 2014, after falling 2.6% in real terms last year. The main drag on private consumption will be tighter

fiscal policy, including sharp public spending cuts and substantial increases in direct taxation. Because the duration of

fiscal austerity measures remains uncertain, households have a strong incentive to keep saving. Besides, economic

difficulties are pushing more Portuguese to leave the country in search of employment, pushing housing demand

down. Officials and researchers say at least 100,000 people are leaving each year.

Over the long term, the market may benefit from more positive structural factors. The affordability index (price to

income), in particular, reached an all-time low in the third quarter of 2013, comfortably below its long-term average.

We also believe that policies that Portugal has implemented in the context of financial support from the IMF will help

revive the market. Activity in Portugal's residential construction sector has steadily weakened since 2000 (see chart 7)

because tenancy laws have discouraged buy-to-let investors by giving tenants controlled rents, and protecting them

against eviction. Housing construction remained very weak in September 2013, with the number of construction

permits issued down 36% on the previous year, bringing the total number to 8,000 a year compared to 65,000 in 2007

and 120,000 in 1999. However, the new housing rental market reform that came into force in November 2013 should

make the housing market more dynamic. It balances rights and obligations of landlords and tenants by enabling

landlords to update rents, gives them more flexibility in the choice of contract duration, sets better incentives for

renovation, and provides new and fast extrajudicial eviction procedure.


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Table 8

Portuguese Housing Market Statistics

(%) 2009 2010 2011 2012 2013f 2014f 2015f

Nominal house prices, % change year on year (0.6) 1.6 (0.8) (2.7) (3.0) 0.5 1.0

Real GDP, % change (2.9) 1.9 (1.3) (3.2) (1.9) 0.5 1.6

CPI inflation (0.9) 1.4 3.6 2.8 0.4 1.0 1.5


f--Forecast. Source: S&P, Eurostat, BIS/private sector.

Spain's House Price Slowdown Is Easing But It Is Not Yet In Recovery

The slump in house prices in Spain came to a halt in the latter part of 2013 on the back of improving economic

conditions and rise in housing demand from foreigners. Still, we don't think Spain's property sector has turned the

corner just yet. Supply continues to significantly exceed demand, while credit conditions remain tight. What's more,


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the Spanish real estate market still appears between 12% and 20% overvalued compared with incomes, rents, and

long-term averages. We have therefore moderated our forecast for house-price declines to -2.0% in 2014 (from -5.0%

in our October 2013 report) and to zero growth in 2015 (from -1% in our previous report (see table 9).

Recent trends

Spanish house prices rose by 0.7% in the third quarter of 2013 on the previous quarter, bringing the first quarterly

increase in three years, according to the National Statistics Institute. On an annual basis, however, house prices

continue to fall, albeit at a slower pace. For third-quarter 2013, they were down by 7.9% on the same date a year

earlier, while second-quarter 2013 prices were 12% down on Q2 2012. This slowdown in price declines suggest that

Spain's economy may be slowly recovering and that new government measures aimed at facilitating foreign

investment have supported the housing market somewhat. However, we still believe Spain's property sector it not yet

in recovery. First, house prices rose only in four Spanish regions, led by the Balearic islands, where there is a lack of

supply and strong foreign demand. The Council of Notaries reveals that foreigners bought 24,552 homes in Spain

during the first six months of 2013, up 13.6% compared to the same time last year. Second, transactions are still very

slow, down 10% year on year in October 2013 to a historical low of 316,000 transactions per year. The Bank of Spain's

third-quarter 2013 data still show Spanish house prices declining 0.7% quarter on quarter and by 5.3% year on year.

What's more, fundamentals driving the residential real estate market remain unfavorable. On the demand side, the

unemployment rate is still very high at 26.7% in November, which is depressing disposable income and compressing

housing demand. Household debt is only slowly declining, to 80% of GDP in the second quarter (from a peak of 87.4%

in second-quarter 2010). Falling house prices are putting further pressure on highly indebted households to deleverage,

which in turn continues to curb household spending and may lead to a further sharp rise in banks' bad loans. In

October 2013, the banks' bad-loan ratio was 13%, up from 11.2% a year earlier. Bank lending is still falling at a rapid

pace. Housing loans contracted by 4.5% year on year in November (see chart 8). On the supply side, the stock of

unsold new home remains very high, casting doubt on the prospects for a sustained recovery in prices. The stock of

unsold new homes declined by 7% to 583,453 at the end of 2012 on the previous year, according to a recent Ministry

of Public Works report. However, the number of unsold new homes has only fallen by 10% from its 2009 peak. Banks

and SAREB (Spain's "bad bank") own about 30% of the total unsold stock.

Future trends

We don't believe the Spanish house price slump over yet. Fundamentals are improving only gradually. After the

Spanish economy's emergence from recession last year, we believe the economy will grow by 0.8% this year and by

1.2% in 2015, while the unemployment rate should gradually decrease to 25.5% by 2015. On the plus side, Spain has

regained competitiveness, owing to adjustments in unit labor costs and implementation of structural reforms. This has

enabled exports to grow at a rapid pace and helped the economy exit a two-year recession. Meanwhile, the adjustment

in the construction sector also seems to have ended. Investment in the sector strongly declined to 9.8% of GDP in the

third quarter of 2013 from a peak of 22.3% in the fourth quarter of 2006. At nearly 10%, this ratio is now well below the

average seen before the formation of the housing bubble. Similarly, the share of construction in total employment fell

significantly from 14.4% in 2007 to 6% in September 2013.

Still, even if very few new buildings have been built in recent years, the excessive stock of unsold houses will continue

to weigh on the price recovery. Moreover, negative drags persist on domestic demand. The household gross saving


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rate has declined to 10.4% in the last quarter of 2012 from 17.8% in the last quarter of 2009. Households cut savings to

support consumption in response to negative income shocks, and hence haven't been able to reduce their

debt-to-income as much as in the U.S. or Ireland. Since the first quarter of 2013, Spanish household debt to income

even started to increase again, albeit only slightly. An increase in the savings rate in line with deleveraging will only be

possible once real disposable incomes increase. However, real wages are currently falling despite low inflation, and

given still high unemployment in Spain, further wage moderation seems likely. Even though the banking sector has

gone through a deep restructuring process, this has not yet translated into looser financial conditions for households.

Furthermore, although the affordability index, measured by price to income, has improved, it remained 12% above its

long-run average in the third quarter of 2013. The price-to-rent ratio, too, was 20% above its long-term average in

September 2013.

Over the longer term, demographic trends will also weigh on house-price growth. Recently released projections by the

national statistical office show that the Spanish population will lose 2.6 million inhabitants over the next 10 years if the

current demographic trends continue. It estimates the population shrunk by 0.5% in 2013, after falling by 0.25% in

2012, and that it will continue shrinking at a slightly higher pace over the next decade. This is in stark contrast to the

hefty population growth rate between 2000 and 2007. Net immigration has been replaced by net emigration of

200,000-300,000 per year while the dynamic of the native population will turn from slightly positive to slightly negative

from 2017. A shrinking population would clearly cap overall housing demand growth in the next decade.

Table 9

Spanish Housing Market Statistics

(%) 2009 2010 2011 2012 2013f 2014f 2015f

Nominal house prices, % change year on year (6.6) (3.3) (7.1) (10.5) (5.0) (2.0) 0.0

Real GDP, % change (3.7) (0.2) 0.1 (1.6) (1.2) 0.8 1.2

CPI inflation (%) (0.2) 2.1 3.1 2.4 1.4 0.8 0.6


f--Forecast. Sources: S&P, Eurostat, Banco de Espana, OECD.


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The U.K. Housing Market Is In Recovery Mode

The U.K. housing market is staging an impressive revival. Boosted by government incentives, a strong economic

upturn, and very low interest rates, nominal house prices rose by 4% in 2013 (see table 10). We forecast they will

continue to expand by 5% on average both this year and next. Our forecast takes into account increasingly tight

mortgage affordability standards by the Bank of England (BoE) to head off signs that the market may overheat.

Recent trends

House-price inflation reached 5.7% in the 12 months to December 2013, having peaked at 8.7% in October, according

to the Halifax building society. Prices have now recovered more than half the ground they lost during the global

financial crisis (a 22% decline peak to trough), and finished 2013 down only 13% from their August 2007 peak. The

surge was mainly in London, which comprises more than 10% of the country's population. In the capital city, 100% of

surveyors reported house-price gains in November, the highest since this series was originally introduced by the Royal


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Institute of Chartered Surveyors (RICS). Yet, RICS also reported that readings for expected sales were also strong

across the country. Overall, transactions were up 10.8% in October 2013 from a year earlier, although they are still

well below their pre-2008 levels (see chart 9). Bank lending has also bounced back markedly, up 36% in value terms in

October from a year earlier.

This upturn is the combined result of several mutually reinforcing factors. The U.K. economy as a whole has returned

to strong real growth, and unemployment is falling. We estimate that real GDP expanded by an average 1.5% in 2013,

from 0.1% a year earlier, following a very severe downturn between 2008 and 2012. As of the third quarter of last year,

real GDP stood just 2.6% below the first-quarter 2008 level. This revival was in good part engineered by the Bank of

England's very accommodative monetary policy, which has kept interest rates historically low since March 2009

(currently 0.5%), and so encouraged household consumption. The central bank has also focused on stimulative

measures for the housing market. First, it introduced the Funding For Lending scheme in 2012 with the overall goal of

reducing bank lending costs for households and companies. Second, it established a Help to Buy program for potential

home buyers. This targets first-time buyers with an annual income of less than £60,000 looking to buy a home worth

less than £600,000 for their own use. If the loan-to-value ratio is less than or equal to 95%, those buyers could receive

an interest-free loan from the government for the first five years of the mortgage amounting to as much as 20% of the

property value. Help To Buy also introduced a mortgage guarantee program last October, which has no income caps

and is not restricted to first-time buyers. It offers eligible mortgagees a government guarantee equal to 15% of the

value of their mortgage. This scheme has undoubtedly started to boost mortgage lending and, more generally,

consumer confidence.

Following this success, the Bank of England announced at the end of November 2013 that it would refocus the

Funding for Lending scheme on lending to the business sector, and that it would remove the relaxation in capital rules

that had been applied to mortgage lending. Noting a marked improvement in the housing market, BoE Governor Mark

Carney said on Nov. 28 that over the past year the Funding for Lending Scheme had contributed to the recovery by

helping to significantly improve credit conditions, especially for households. He said the refocus on lending to business

would underpin the supply of credit to small businesses over the coming year "without providing further broad support

to household lending that is no longer needed". The statement reflects the central bank's concern that the housing

market upturn may be too strong, resulting in rising household debt ratios and an unsustainable house price trajectory

over the coming quarters. Nevertheless, Help to Buy remains unaffected.

Future trends

The U.K. economy's recovery looks set to continue in 2014. We forecast GDP growth of 2.3% this year, (from 1.5% in

2013), primarily driven by household consumption and an inventory rebuild. The outlook for corporate investment

remains less certain and could influence the strength of the recovery either way. The U.K. presently has one of the

lowest investment-to-GDP ratios among G8 countries. The prospects of robust domestic demand could trigger a surge

in capital expenditures after years of weakness. Yet recent evidence provided by business surveys, such as the CBI's,

lead us to remain cautious.

Against this backdrop, we believe the BoE will want to continue delivering a substantial stimulus to keep the recovery

on track, while avoiding a new housing bubble forming. The first goal falls under the bank's Monetary Policy


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Committee (MPC), while the second is more the responsibility of the recently created Financial Policy Committee

(FPC). In a first step, the BoE Monetary Policy Committee (MPC) last August introduced a forward guidance

framework, which aimed to provide financial markets with a clear signal that the bank intends to keep interest rates

low for a very long time. It said it would not reassess this policy stance until the unemployment rate had fallen below

7%, which at that time it projected would be in the latter part of 2015. However, the decline has been much more

rapid, with unemployment averaging 7.3% in third-quarter 2013. The BoE now projects that it will dip below the 7%

threshold in first-quarter 2014. The MPC has since aimed to convince markets that it is not ready to raise rates. We do

not anticipate interest rates will rise this year and expect a first hike only in the final months of 2015.

One of the BoE Financial Policy Committee's tasks will be to prevent the market from running out of control. To do so,

the FPC has a number of tools at its disposal. In his November press conference, governor Carney stressed that the

bank would not "sit back and hope things turn out all right, because we have a statutory responsibility". He emphasised

that "the experience in financial stability…is that by acting earlier you reduce the need to act to a greater extent later."

The FPC has now introduced a new macro prudential tool to tighten mortgage affordability standards. We believe the

FPC will closely monitor a set of housing market indicators relative to affordability and sustainability, as well as the

exposure of lenders to highly indebted households and their reliance on short-term wholesale funding. The central

bank therefore appears to be engaging with the housing market much more explicitly than before. We expect nominal

house price to grow 5% on average this year and next on the back of increasingly tight mortgage affordability

standards.

Table 10

U.K. Housing Market Statistics

(%) 2009 2010 2011 2012 2013f 2014f 2015f

Nominal house prices, % change year on year 0.3 3.8 (0.5) 2.3 4.0 5.0 5.0

Real GDP, % change (4.0) 1.7 1.1 0.1 1.5 2.3 2.0

CPI inflation 2.2 3.3 4.5 2.8 2.7 2.3 2.1


f--Forecast. Sources: S&P, Eurostat, OECD, Department for Communities and Local Government.


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Related Criteria And Research

• Europe’s Home Price Declines Continue, But Stabilization May Be Around The Corner, Oct. 31, 2013

• These Green Shoots Will Need A Lot of Watering, Dec. 12, 2013


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