The US Federal Reserve announced a third consecutive cut in its prime rate this week, (19th March 2008) to assist the banking sector reeling from a lack of confidence following a property market collapse and secondary market liquidity problems. The cut, which comes despite a weakening dollar contrasts the policy of the ECB who have failed to take action even though property markets in Europe are showing signs of the strain. These were never more so evident than in Spain where a once vibrant property market on the Costas has been stifled by the rising Euro.
Following a rise in interest in January, property purchasers looking to buy a holiday or retirement home on the Costa Blanca coast in Spain have been discouraged from completing on their purchases due to the increasing strength of the Euro against the pound.
The Euro which has been gaining strength not only against the pound, but against a weakening US currency, has come under increasing pressure to follow the US lead and cut interest rates to ease pressure on property markets world-wide as well as the spiraling cost of crude oil.
Problems for the ECB lie in the fact that the Euro zone economy has not seen economic indicators as strong as those in the US that a serious slowdown is on the way and have been retiscent to cut interest rates until more definitive signs are reported. Part of this problem could lie in the fact that the Euro zone economies are not yet homogeneous enough to warrant the single picture scenario. It could be seen that any interest rate cut would be more of a political move which may end up hurting some member countries economy at the expense of others. This was always going to be a problem with the Euro zone, where mobility of labour has been an issue.
With so many languages involved, it is much more difficult for the Euro zone workforce to cross borders and language divide to find jobs in another geographical area of the Euro zone. This means that pockets of unemployment appear next to areas of near full employment in a given industry or sector. Normally, as you would find in the US, a worker would be able to move from the East to West coasts to fill job shortages. In the Euro zone this does not happen leaving divergent economies being governed by one central banking policy.
As far as it affects property markets, the 10% depreciation of the pound against the Euro has all but wiped out any correction in Euro based property prices in Spanish coastal areas, which have been suffering from a correctional downturn for nearly three years. Popular resort towns such as Javea, Moraira and Calpe had seen some increased interest in property for the first time in more than a year. Since January though, the appreciating Euro has meant that prices for British residents, who make up the majority of purchasers, have effectively risen in real terms.
Hope now rests with the European Central Bank cutting interest rates to bring the exchange rates more into line with historical norms. Otherwise the market will continue to drive agents out of business at a rate never before seen. The lack of business in the sector is not only in the Costa regions of Spain. The domestic economy has seen share prices in construction company stocks plummet over recent months. Fears of over supply in the industry have driven stocks lower on the back off the weakened demand.