Summary:
- Housing prices in the EU continue to fall, albeit at a slower pace.
- Inflation in France and Spain continue to fall as the entire Euro Bloc could fall into deflation soon.
- The EU is more worried about asset bubbles forming when they should be encouraging mortgages to first time home buyers.
The European Union (EU) has been mired with nearly zero inflation, which is threatening to contract even further into deflation. The European Central Bank (ECB) has been waging an all-out war to prevent this and spark inflation, but so far nothing has seen to help. Last week, we got even more bad news when housing prices fell for the second quarter in a row. The EU recovery is certainly weak, if not weaker than many have thought.
In other data released, which was also gloomy, industrial production saw widespread declines in May. This indicates growth is more modest than expected in the second quarter. Also indicates growth for the second half of the year will be modest as well.
The prices for homes across the 18 country currency block fell 0.3 percent since the final three months of 2013 and since Q1. However, the pace of the decline has decreased. Prices have fallen 1.5 percent on an annual basis. Prices were down in most EU countries. Especially the larger ones. They were down one percent QoQ (quarter on quarter) in France, 0.6 percent in Italy and 0.3 percent in Spain. There is now Eurostat number for Germany which is the largest economy in the Eurozone. An estimate, based on figures from the ECB show a rise of one percent in Q1 from Q4 of last year.
The continuing decline in housing prices all but highlights the weak, fragile recovery occurring in the EU. If the housing prices were going up, then we could say consumer confidence was high. This would make home owners feel the wealth and in turn would be willing to sell and spend. The weakness in consumer spending has been a major factor and drag on the Eurozone’s flagging economic recovery.
The decrease in housing prices is also a broad sign of overall weakness in inflationary pressures. The bloc’s annual inflation rate was a mere 0.5 percent in June. The ECB has a target of two percent. Figures, released last week, showed the inflation in France fell to 0.6 percent from May’s 0.8 percent. This means, we can expect an even lower figure today when Eurostat publishes the inflation number for the EU later today.
The ECB, in response to the low inflation, just last month instituted a new funding for banks to encourage lending to businesses. They also set the bank deposit rate to negative, effectively charging banks to keep money with them. This is done to spur lending, which will spur spending and hopefully inflation. The only caveat, banks cannot use this cheap, medium term funding to make mortgage loans.
Why is this? Mario Draghi, president of the ECB, wants to ensure that these low and negative rates do not create asset bubbles. This could threaten the very fabric of the financial system and its stability. However, there is no imminent risks of a housing bubble. Let us look at the U.K. where home prices were up 2.2 percent, in Sweden they are up 2.4 percent. Maybe Draghi needs to take chance before deflation sets in.