Slowdown in House Price Growth Could Delay ECB Interest Rate Hike

House price growth in Eurozone countries has been steadily decreasing for a number of months. The current slowdown in Eurozone housing markets could jeopardize the region’s economies. Many Eurozone countries have experienced exceptionally high growth levels over the past number of years and may find it difficult to adjust their economies accordingly.

Countries such as Ireland witnessed unprecedented growth in the housing and construction sectors in the years leading up to 2006 when they peaked, and have steadily slowed since then. Much of this growth has been attributed to low Eurozone interest rates, which bottomed out at around 2%. The end of 2005 saw the beginning of interest rate increases, a trend which continued throughout 2006 and 2007 to date, and saw interest rates doubling. This put increased pressure on borrowers and contributed to the marked slowdown in the housing market. Ireland is particularly susceptible to interest rate hikes, given the large proportion of variable rate mortgages that exist here.

It is thought that the expected average rate of increase for house prices in the Eurozone will stand at around 4.3% for this year. This is a notable decrease in growth levels, an historic low in the short history of the Euro. It is thought that this will have a negative impact on overall growth levels in the Eurozone area. GDP has an expected level of 5% for this year, having been revised downward in recent weeks. Yet despite the decreasing growth levels, it does not appear as though the Eurozone is about to see any economic crashes as a result, as growth in most countries continues to climb, however slowly.

The slowdown in growth levels and an overall dampening in housing market activity are expected to delay the forthcoming ECB interest rate hike. Given that the US Federal Reserve has recently taken steps to cut its primary rate of interest in light of current credit market difficulties, it is unlikely that the ECB will increase interest rates so soon. The crisis in the money markets has already seen borrowing costs escalate. This disincentive to borrow could massively reduce investment and drive growth levels down further. In order to determine whether an interest rate increase is necessary or not, the ECB will doubtlessly be monitoring markets heavily in the coming weeks.

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