Housing booms turn to economic bust
Around Europe and the world, smaller economies are already shrinking, with Spain, Ireland, New Zealand and Denmark all suffering from collapsing house prices.
While the financial press concentrates on forthcoming recessions in the major economies, some smaller ones are already shrinking, or about to contract. What they have in common is a property boom that has turned to bust, reducing growth by hitting construction and undermining consumption as falling house prices make people feel less wealthy.
Take Spain. House prices tripled between 1997 and last year and investment in housing accounted for 10% of GDP in 2006, twice the eurozone average. Construction financing became ever-more expensive following eurozone rate hikes and tighter credit last summer, and home sales and prices have since slid.
The rot has spread as eurozone interest rates have remained high, with rising unemployment along with inflation causing a slump in retail sales. "There's a high likelihood" that Spain could be in recession by the end of the year, said one analyst. First-quarter growth was just 0.3%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The end of Ireland's boom
In New Zealand, "the old drivers of growth", easy access to credit and increasing housing wealth, "have dissipated", said Commonwealth Bank's Chris Tennant-Brown. Growth contracted by 0.3% quarter-on-quarter between January and March and is set to shrink further in the second quarter, fulfilling the technical definition of a recession.
Denmark, where house prices more than doubled before peaking, is already there with negative growth late last year and early this year. It's the first European country in official recession. As Gilles Moec of Bank of America put it on Reuters.com, "who sinned by housing is punished by housing".
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
Starling Bank to scrap 3.25% interest rate from popular current account within days
Starling is to remove the generous 3.25% it pays on current accounts from next week – what does this mean for customers and should you move?
By Katie Williams Published
-
Top 20 UK areas where house prices have ballooned in last 25 years
Some parts of the UK have seen house prices grow by 652% since the turn of the millennium
By Daniel Hilton Published