Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Gros's interest is in a direct comparison witht he US, and to that end he averages out Eurozone house prices and says they are following US fairly closely. This is what he says about the economic effect of the rise:

The key reason why US housing prices have attracted so much attention is that a property price
crash or just a deceleration of the rate of increase of housing prices in the US would almost certainly weaken private consumption through wealth effects and ncreased uncertainty about the economic outlook. This is well known, but the data presented here imply that the same
danger exists for the euro area. In the euro area, the wealth effect might be less strong and consumers might be less indebted, but a fall in housing prices could instead also lead to an abrupt fall of new construction investment. Moreover, a fall in housing prices may jeopardise a part of the outstanding loans of the banking sector and force banks to raise reserves. This could reduce their willingness to extend credit to businesses and consumers. While the exact details of the transmission mechanism are different on the two sides of the Atlantic, it is clear that both sides face a quite similar risk.

Substantially, he's saying there would be:

  • a drop in contruction investment;
  • tightening of credit;

but not:

  • a hit on the "wealth effect";
  • a consumer debt problem.

I don't see how that is equivalent to a "quite similar risk".

He also doesn't address why consumer demand has only risen recently, while the property market has been booming for some years.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 29th, 2006 at 02:39:28 PM EST
[ Parent ]

Others have rated this comment as follows:


Occasional Series