Now, that hope may be dashed if she can't find a mortgage, or if the interest rate on a mortgage is too high. Ms. Caro has cut back her spending on vacations and clothes, and recently she began teaching private classes in the evenings to earn extra cash. She said she has stopped following interest rates "or I will go crazy."
In the third quarter, 22% of banks surveyed by the European Central Bank reported that they were tightening standards for mortgages, with 10% easing and the rest unchanged. Banks that raised the bar cited deteriorating bank balance sheets and weaker housing-market prospects.
"The ECB had already been raising rates to cool things down, and it was having an effect," said Ken Wattret, an economist with BNP Paribas SA in London. "Now, you've got this credit crunch on top of it, which could not only restrict households' access to funding but also slow the housing market more sharply."
In Ireland -- where economic growth, an influx of immigrants and low interest rates helped quadruple house prices over the last decade -- the boom also may be ending. Falling house prices will push construction of new units down to 60,000 in 2008 from last year's record 88,219, according to a recent study commissioned by Ireland's environment ministry.
Construction accounts for some 13% of Irish jobs, and the slowdown prompted the Economic and Social Research Institute in Dublin to reduce its forecast of Irish gross-domestic-product growth next year to 2.7% from 3.7%. David Duffy, a senior researcher at the institute, said: "It would still be a good growth outturn in a European context."
Some European countries experienced less of a housing boom and are feeling less of a hangover now. In Germany, the largest economy in Europe, a preference for renting has kept house-price growth limited. In an interview last week, German Finance Minister Peer Steinbrück listed cities, including London and New York, where he believes there might be a property bubble, and then added pointedly: "Not in Berlin."
In France, government regulation has limited construction, so French houses still are in short supply, unlike in Spain and Ireland. Also, the majority of French mortgages carry a fixed interest rate, meaning homeowners are less sensitive to rate increases. That is why economists expect any slowdown in French home prices to be gradual.
The variations across Europe complicate the ECB's rate-setting decisions. Earlier in the decade, its low interest rates were suitable for slowly expanding countries but helped foment the housing boom in high-inflation, high-growth countries. Now it is keeping rates higher, which may not be ideal for all 13 countries that use the euro. ECB officials have stressed that inflationary threats are likely to prevent them from cutting the bank's benchmark 4% rate soon.
During the boom, Spain and Ireland "needed higher interest rates, but the ECB was setting policy for France and Germany," said Desmond Lachman, an economist with the conservative American Enterprise Institute in Washington. "Now, when these countries need lower rates to offset the bust, they're not going to get them."
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source: realestatejournal.com
