News: Eastern Europe unsustainable?

Wed, 14 Nov 07

Fast paced house price growth in post-Communist Europe is probably unsustainable and prices could moderate as global borrowing conditions become tighter, the EBRD said on Thursday...

The European Bank for Reconstruction and Development said in its annual Transition Report that an improvement in housing supply could also temper price growth, and warned that any major declines could have a significant economic impact.

"On the basis of income levels in 2006, house prices appear on the high side only in a few capitals. However, the speed of price increases in recent years looks unsustainable in many countries as continued growth would soon lead to overvaluation," the report said.

"As housing supply improves and credit conditions become tighter in the coming years, some moderation in house price growth is likely."

Rise of a sleeping giant?

Dormant during decades of Communist rule, property markets have boomed across the region in recent years as rising wages and easier access to affordable credit convinced people to invest, especially in large cities and coastal areas.

Although the level of debt in relation to gross domestic product is still low on average in the transition region, the bank said a lack of other household financial wealth that could act as a buffer to sustain consumption "is a cause for concern".

It added that real price increases have been the highest in Ukraine, followed by Romania, Latvia, Estonia, Lithuania, Bulgaria, Russia, and Armenia, running at an average annual growth rate of more than 20 percent, well above real GDP growth.

Significant impact expected

The report said the persistent period of increasing house prices has fuelled expectations of potential capital gains, leading to increased speculation.

"In Kazakhstan and Ukraine, for instance, there are signs that many residents have been investing in apartments with the sole purpose of selling them on in order to generate a profit," the report said.

"How households react to larger declines in house prices, leading to negative equity, is largely untested in the transition region and so there may be a significant impact on the real economy."


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