House prices ‘moderately overvalued’

HOUSE prices in Ireland were only modestly overvalued over the past few years, according to an EU report on eurozone property.

Prices were in line with the rapid growth of the economy and the disposable income of households, the special report said.

It said the drop of 30% in the average cost of housing may have brought prices to below what could be considered to be in line with the country’s GDP and household income.

The report found houses were overvalued in all eurozone countries except for Germany and the Netherlands at the end of 2008.

In Ireland, France and Italy prices were moderately overvalued at up to 10% above what is described as the equilibrium value.

As a result most countries entered the global economic crisis with prices that were higher than the properties were worth.

Spain, which like Ireland suffered a collapse in the housing market, and Finland were the two countries where property was significantly overvalued.

None of these markets, however, experienced the overvaluation that took place in Britain or the US, where prices were up to 20% overvalued.

But with the economic crisis came a readjustment of prices as credit conditions tightened and disposable income dropped.

As a result, in the third quarter of last year, France and Italy reached a more or less balanced price level, while Spain was still showing sizeable overvaluation, and in Ireland prices were below the equilibrium level, the report said. But while most countries adjusted their prices slowly, by around 7%, Ireland registered a drop of 30%, the report said.

For the euro area as a whole the adjustment in house prices is good for the future recovery in housing investment and private consumption, it concluded.

The report also looked at current account deficits in the euro area, finding that rising unemployment and slow growth can be mitigated if prices and wages respond appropriately and competitiveness improves.

“So far there have been only a few signs of rebalancing of prices and competitiveness across the euro area and further efforts are clearly needed here,” the report said.

The report found that corporate health is essential to a swift recovery of economies.

Ireland, Slovenia and Spain experienced a corporate balance sheet adjustment far exceeding the eurozone average.

At the same time the adjustment was lower than the average, in particular, in the Netherlands, Germany and Finland.

The report said it is essential to address the remaining problems in the banking sector, economic policies must be geared towards boosting potential growth, and these policies should be front-loaded to the greatest extent possible.

Finally, the report found that corporations’ access to equity capital should be improved to reduce the need for balance sheet adjustments to be funded through internal savings, such as cuts in investment as well as in wages.