Exchange Rate Appreciation Wipes Out Gains In Property Markets

by : Neil Ebsworth

Property markets on the Costa del Sol and Costa Blanca have seen sales stall in recent weeks as the value of the Euro has effectively wiped out price savings made in Euros during the recent market correction.

Property markets across Europe are waiting for action from the European Central Bank, (ECB) following moves by the Federal Reserve in the United States to cut interest rates for third time. The move by the Fed which is directly related to the property crisis in the US has seen the US currency weaken even further against the Euro and sterling, following no reciprocal action by either the Bank of England or the ECB.

Whilst moves by the Fed are independent and some would say that indicators in the Euro zone economy are not yet reflecting as large a slowdown as seen in the US, the strength of the Euro against all major currencies is having a knock on effect causing higher energy prices as well as stifling a property market that could do with a little help to stop into sliding into collapse.

The effect of the stronger Euro can be most dramatically seen in the Spanish Property market which has been struggling to keep its head above water for nearly three years. Following a sustained period of growth up until 2004/5, the market initially saw a correction in prices as rising interest rates started to dry up demand. With the recent strength of the Euro in the past couple of months, this price correction has all but been wiped out for the largest market for buyers, the British, who now are also beginning to feel the fallout from the credit squeeze which originated in the US, but whose effect was witnessed by the collape of the Northern Rock Bank and a slowdown in the domestic property market.

Whether the ECB will act during its meeting in April is yet to be seen. It has in the past been slower to react to market indicators than other central banks. Part of the reason for this has been the diversity of economies that it is trying to control. It is difficult to set monetary policy in the Euro zone without having different results from different member states. Unfortunately the members of the Euro economies are not necessarily all on the same economic path and the ECB may have to wait until recessionary pressures across the whole zone are clearer, before it finally acts.

This was always seen as one of the downsides to the Euro when it was first set up. The convergence of the economic indicators necessary to join the currency was no guarantee that the members economies would stay on the same path. Mobility of labour being just one of the factors that would hinder the economic parity across the region. This hampers any decision making by the central bank as it tries to stay politically neutral when making fiscal policy. Any policy that has a negative effect on one members economy over another could be seen to have been made under political pressure or bias.

The result is that, by the time the bank has enough indicators in its favour to make a decision to act that will not anger some of its members, it may well be a case of the stimulus door having been shut after the recessionary horse has bolted. Whether the current situation turns out to be such a case will only be determined retrospectively. In the meantime, property markets across the Spanish Costas must hope that the general indicators of a slowdown catch up with the feeling all to evident in their industry now.