World Property: Could house prices tumble soon?

Can Merkel's moves improve Obama's re-election chances and prevent a property meltdown?

High household-debt levels and adverse property price-to-income and price-to-rent ratios in several rich countries could lead to a further steep decline in house values, claimed The Economist last week.

Central bankers come to the rescue

The announcement that the US, UK, European, Japanese, Canadian and Swiss central banks intend to work together to "ease liquidity conditions in financial markets", as The Economist described it, to reduce the rising threat of a credit crunch particularly in the Eurozone, can only be seen as an attempt by the Americans in particular to off-set the chances of a global recession during an election year. Could Barack Obama survive amidst the second half of a double-dip recession? 

And at last, so does German Chancellor Angela Merkel

Since the central banks' press statement, German Chancellor Angela Merkel and French President Nicolas Sarkozy have announced that Germany and France will devise a route towards fiscal union. A Eurozone leaders meeting is due to take place in Brussels next week to hammer out a plan to create a two-speed Europe with France and Germany at the core embracing fiscal unity and the periphery on the edge. It's a bit unclear to me how this might work in practice. 

But does Merkel have a cunning plan?

Fine for Britain, Denmark and those countries which never adopted the Euro. But for Italy, Spain and Greece which did, how could they stick with the single currency when not inside Sarkozy's "zone of stability" yet subjected to "severe sanctions" when failing to meet their "responsibilities" as the BBC called it?

As France faces credit downgrades from key ratings agencies and Germany enters recession, the notion that they constitute a "zone of stability" appears fanciful.

And how could it work exactly? Merkel emphasised that the "German constitution does not permit devolving budget control to a European institution" yet she's proposing "fiscal union" across the Eurozone. These two things seem contradictory. Unless, that is, she plans to relocate to Frankfurt budgetary control of all European states. UKIP leader Nigel Farage reminded members of the European parliament recently that the European Union was set up after WWII to avert the dire prospect of German domination of Europe, yet it looks now that that is precisely what Europe will endure. 

Britain's in a precarious place though

Britain's PM, David Cameron, shot off to Paris to meet Sarkozy. Another Eurozone recession would harm the UK as it struggles to recover while rapidly reducing a debt mountain. 

The Brits are stuck between a rock and a hard place. They need to repatriate powers from Brussels to unravel damaging regulations and prevent Europe from enforcing fresh ones, yet they are prevented from taking action which might further hurt the Eurozone.

Cameron is hamstrung by the 2010 coalition agreement with the pro-European Liberal Democrats. But the more he dithers, the more he will face vociferous criticism and growing opposition from Eurosceptics both in his own Conservative party and from UKIP. 

George Osborne, the Chancellor of the Exchequor, has detailed plans in his Autumn Statement to do everything possible to encourage growth and prevent recession. He will have his work cut out, especially as the precarious state of the UK economy has been hammered lately by public sector workers striking over austerity measures and pension changes.

However, are the Europeans moving fast enough to avert a house price collapse?

The speed Merkel, Sarkozy, the European Central Bank and the European Commission have moved to date to thwart the impending Eurozone crisis has sent equity and bond markets into tailspin. Things move tortuously slowly in European democracies (Belgium is STILL without an elected government some eighteen months after having voted!) and this has done little to alleviate investor or credit ratings agency angst. German sloth might have been induced by their own domestic business sentiment remaining stubbornly bullish. Until very recently, that is. Perhaps that's why Merkel can now act, maybe the Germans are finally being squeezed by the crisis. Thank goodness they've at last got the message.

And maybe Germany will finally get its way when neighbouring Europeans fall sheepishly into line. The prospects for the sovereign rights of individual European nations look worse today than at any time since 1945, however. 

But the slow speed in which this could evolve leads me to suspect that a credit-induced recession will not be averted and that residential property values will suffer sharp declines.

So, which countries are at risk of a bursting housing bubble?

Britain is a key constituent of that rich country list, The Brits and others are highly exposed to a popping of the property bubble. More in danger still (in order of vulnerability) are Belgium, Canada, France and Australia, calculates The Economist. Hot on the heels of those four come New Zealand, Sweden, Spain, Netherlands and then Britain. Denmark, Italy, Ireland, Switzerland, the US, Germany and Japan are listed in declining order of risk. 

And has recent action helped?

The U.S. Federal Reserve and other central bankers might have staved off the chances of credit being squeezed again but, as The Economist noted, the "most significant near-term threat to the global economy—the problems of debt and contagion in the euro zone—continues to grow." 

If Merkel moves slothfully towards a resolution—as she is wont to do—this threat will simply grow. And simultaneously Obama's re-election prospects can only get grimmer.

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