European Real Estate Market and the European Crisis

European Real Estate Market and the European Crisis

The European crisis was caused by a combination of asset price increases, mainly in the real estate sector, and credit that led to excessive debts from countries like Greece, Portugal, and Ireland (which is affected by the US recession). Due to these excessive debts and the increase in prices, other European countries have been struggling with strategies to assist with their co-member countries’ crisis-related problems. Moreover, the effects of these problems have also spread to other countries like Italy, Spain, France, Belgium and the United Kingdom, and to other parts of Europe.

There are two main reasons behind the transmission of the occurring crisis within Europe. One is the risk aversion of the investors- they did not want to take great risks on investments, such as larger security bonds. Due to the lack of such investments, the flow of monetary units in Europe decreased such that there was not enough money circulating within the economy, which in turn, increased the market prices. On one hand, it also increased the volatility, which refers to uncertainty on the size of the changes in values. The second reason is the sudden drop of demand, especially for capital intensive goods. These combined factors created a chain reaction to the strong connections of the European countries and resulted in debts and the looming of the crisis.

This crisis has also affected the real estate industry. Factors of the crisis that have affected the real estate industry of Europe include the unemployment rate and consumption. The unemployment rate in Europe has reached its peak; as companies downsize and reallocate their resources, the crisis has forced the redefining of the real estate industry of Europe.  Due to the high unemployment rate, consumption has inevitably dropped– this includes the real estate market as well. As property prices increase, or remain at high levels, there are more people who lack the purchasing power to buy properties. Thus, the real estate industry of Europe has been in a state of doubt and fear. The hope of a quick recovery from the crisis has been replaced with an acceptance that the effects of the crisis and the crisis itself may remain for a while.

European countries, particularly members of the European Union, have undertaken measures and policies to ease themselves out of their present situation. The EU has created the European Financial Stability Facility (EFSF) and European Financial Stabilisation Mechanism (EFSM). These are emergency programs to provide large amounts of money for the weaker member states of the EU, such as Greece, Ireland, and Portugal. Aid requests will need to be made to acquire funds from these programs. EFSF can issue bonds to raise funds needed to provide loans, to recapitalize banks, or to buy government debt. On the other hand, EFSM is reliant upon funds raised on the financial markets and is guaranteed by European Commission, with the budget of the EU as collateral.

Aside from these funding programs, the union has also encouraged the weaker states, especially Greece, to adopt drastic austerity measures to reduce their deficit spending and such member states of the Euro Zone have begun implementing them to stop the crisis from worsening. The crisis has also caused political disputes among countries due to the debts incurred. Intervention from the governments and the European Central Bank have also temporarily helped. Austerity measures and the funding programs are still being implemented to keep the crisis from bursting throughout the European economy and its markets, including the real estate market.

The European Central Bank (ECB) has also intervened to help ease the crisis temporarily. The ECB opened market operations for buying government and private debt securities, which reached 211.5 billion Euros by the end of 2011, and the same amount was absorbed to prevent inflation. The ECB also opened two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTROs) and reactivated dollar swap lines.

Through the efforts of other countries like Germany and France, programs such as the Fiscal Union, the Eurobonds and the European Stability Mechanism were created to provide long-term solutions that would permanently diminish the debt crisis:

European Fiscal Union

  • Formed by Germany France and other smaller EU countries.
  • Implements stringent and enforceable fiscal rules and automatic punishments fixed in EU treaties.
  • It applies a strict cap on government spending and borrowing, with penalties for those who violate the terms of the agreement.

Eurobonds

  • Issued jointly by 17 euro states. It is thought to be an effective way to deal with the crisis.
  • It must significantly raise a country’s liabilities in a debt crisis.
  • It must be coordinated with rigid fiscal surveillance and economic policies to evade moral hazards and to guarantee public finances.
  • It would stabilize European debt above 60%, merging it with a bold debt reduction scheme for countries not receiving life support from EFSF.

European Stability Mechanism

  • A permanent rescue funding program to succeed the temporary EFSF and EFSM.
  • It is an inter-governmental organization under public international law.
  • Approved a two-line amendment to the EU Lisbon Treaty to permit a permanent bail-out mechanism and stronger sanctions.
  • It is a financial firewall: it ensures that drooping nations and banking systems are secured by guaranteeing some or all of their obligations.
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