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European Property Market Awaits Action From The E.C.B.

Mar 30, 2008
The Federal Reserve in the United States has now cut their prime interest rate three times in as many weeks in an attempt to stave off a recession that many believe has already arrived. Unfortunately the US Real Estate market, which is dominated by long term fixed rate mortgages will not benefit from these cuts in the same way as home-owners in European countries do.

The problem lies in the historic nature of mortgage lending which varies considerably in the US from the standard model used across Europe. In the US it is commonplace to take out a mortgage with a twenty-five year fixed rate at the time of purchase, rather than rely on the fluctuating standard variable rate mortgage that is more commonplace in the UK and across Europe.

The resulting affect of an interest rate cut in the UK would immediately see a benefit to existing home-owners in terms of lowering their monthly repayments, whereas in the US a rate cut only provides a stimulus to new borrowing that can be now be obtained a the new, lower rate. Whilst this makes first time borrowers more likely to step into a weak real estate economy, the total affect has less of an impact on consumer spending than a similar rate cut by the E.C.B. or the Bank of England.

One thing is certain though. A recession in the US is very bad news for the global economy and whilst the sub-prime credit crisis which originated in the US may have little direct effect on the economies in Europe, the knock-on effect of a US recession has historically seen recession across the major economies around the world.

The question is then, why are the European Central Bank and the Bank of England refusing to move on interest rates? Surely a cut in the E.C.B rate would take pressure off the dollar which in turn would have a positive affect on the price of oil and help cut rising energy costs across the globe. It would also stimulate both the british and European property sectors, who are currently balancing of the knife edge of a collapse that hasn't been seen in the UK since 1989.

Maybe the European Union is too diverse an economy and it is this, that is holding back the E.C.B. from action. It has always been asserted that the lack of mobility of labour in the E.U. could be a source of keeping the economies of the members on different inflationary paths, making it difficult for the central bank to act decisively on interest rate policy when by doing so, one members economy may benefit to the detriment of another. By doing nothing however, the ECB stand the risk of pushing the property sectors in many countries into decline. It can already be seen in markets such as Spain, where any fresh impetus from overseas buyers due to recent falls in property prices, has been extinguished by the strengthening Euro against the pound. As British buyers make up over 65% of this holiday property market, the nullification of any price adjustments has dampened what was already a pretty 'wet' market.

What, if any, action is taken by the E.C.B. will have to wait until they meet again at the beginning of April . Until then, it can be assumed that the longer they delay, the worse the overall slowdown may become.
About the Author
Neil Ebsworth is the founder of AMLASpain, the Spanish MLS for property in Spain and Holiday Rentals Spain
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