European Real Estate Bubble Economist Robert Shiller developed a definition of an economical phenomenon known as a bubble.

This definition was published in the 24th edition of the Wall Street Journal. According to Shiller, A bubble occurs when exaggerated expectations of future prices increase unusual demand either by people who fear being priced out of a market or by investors hoping to make a lot of money fast. A bubble is a self-fulfilling prophecy for a while, as successive rounds of buyers push prices higher and higher. But the willingness to pay higher and higher prices in fragile: It will end whenever buyers perceive that prices are no longer going up. Hence bubbles carry the seeds of their own destruction. Only time is needed for bubbles to end. To summarize this impressive Shillers definition: a bubble is temporary condition caused by baseless speculation in specific market that leads to a rapid increase in real estate prices. The bubble eventually bursts, resulting in a quick decline in prices. The same actual symptoms were seen in the real estate industry a few years ago. The inflating housing bubble and sudden collapse of it had massive consequences worldwide and was one of the causes of the Global Economical Crisis that began in 2008. The real estate bubble started to form back in 2004 when housing prices began to soar and push construction and home sales to a new level. According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past ve years, to over $70 trillion, an increase equivalent to 100% of those countries combined GDPs. (Economist, 16 July 2005). The situation in the market got even worse when the home owners started to take out adjustable-rate mortgages that allowed the owners to make money as time went by and the mortgages were adjusted. Due to the constantly increasing real estate prices the mortgaged houses started to get even more valuable and banks paid the surplus amount to the owners. Therefore, people were able to cash in their houses to buy cars, pay for vacations or simply to meet their expenses. However,
1

speculations like this did not end well for the majority of loan holders. It resulted in a huge wave of defaults and foreclosures. (Nation, 1 October, 2007). What initially started in the U.S quickly spread worldwide, as the burst of housing bubble rapidly reached Europe and impacted the economy of the continent. As the New York Times reports, the collapse of the bubble affected not only the housing market, but the employment sector as well. As a result of the shrinking real estate market, a great deal of employment positions in the same market faced pitfall as well. The bubble had negative implications to not only economically weaker countries, but as well as to major European countries. For instance, the bubble hit United Kingdom, France, Italy and Spain. Housing prices in French market rose by 120% from 2000 to 2008, reports Seeking Alpha. (Seeking Alpha, 12 February 2012). Despite the fact that real estate prices reduced by 5.6% in 2009, they continued to rise the year after. According to Seeking Alpha, the French housing bubble is strongly driven by the Paris region, where prices have jumped 18% in 2010 and approximately 10% in 2011, up more than 40% since 2005. Similar things happened in the United Kingdom. The country saw the prices of the real estate rising from mid 1990s to 2008. Throughout this period, the prices nearly quadrupled. Similarly to France, the housing bubble in the UK was primarily driven by the real estate prices in London. Seeking Alpha asserts that, prime London housing prices rose a hearty 11.4% in the 12 months to October 2011. The issue of both London and Paris is that these two cities are viewed as the most prestigious cities in the Europe to own a house. For this reason, the two cities are attracting more and more foreign buyers, which in a way help to accelerate the growth of the bubble. Robin Hardy, an analyst at London investment firm Peel Hunt, states: "London property is the 'Swiss bank account' of the 21st century." Therefore, rich people in places like Egypt, Syria and southern Europe are rushing to get their money in millionaire's playground of central London. Whereas, Paris is viewed as the most overvalued housing market in Europe, and

third most in the world. Prolonged period of easy finance and real estate price growth has endangered French banks, and may lead to new economic issues. (Seeking Alpha, 12 February 2012). Another huge European economy Spain faces even bigger problems. The Spanish bubble began to burst in 2006. The households in Spain are over indebted, going from 75 percent of their available revenue in 1995 up to 133 percent in 2006. (GEAB, 16 June, 2007). As a result, Spain faces major financial deficit. In 2006, Spains balance of payments deficit was abyssal: USD 98.6 billion. It is three times the French deficit and it must be compared to Germanys USD 105 billion surplus. (GEAB, 16 June, 2007). Germany, on the other hand, managed to evade the initial bubble that started worldwide in 2000s. German government had strict regulations on mortgages and loans and was able to avoid reckless borrowings by households. However, unfortunately for them the situation is changing. European Central Bank has introduced ultra-low interest rates on its loans that should help PIGS countries (Portugal, Italy, Greece, Spain) that are going through economical hardships. However, such interest rates are too low for strong countries, like Germany, resulting in negative interest rates and fears of inflation. As is common in countries with negative real interest rates, German investors are pulling money out of low-yielding bank accounts and investments and plowing it into all types of real estate, causing prices to boom for the first time in a very long while. (Seeking Alpha, 12 February 2012). Seeking Alpha reports that property prices in Munich and Hamburg rose by more than 10% in 2011, while obscure fields and forests in northeastern Germany's Uckermark region have soared by as much as 20 to 30 percent. It is still too early to determine whether Germany is on the verge of housing bubble and is going to encounter bigger problems, but the situation in the country really demands careful monitoring.

Norway is another state currently residing in the high risk zone. The country has bounced back from recession by having large reserves of oil. However, the country now must face another threat: inflating real estate bubble. Reuters report that low interest rates have kept Norwegians borrowing at the sort of pace that prompted banking and housing crashes in the UK, U.S., Spain and Ireland. According to Reuters data, at the end of 2008 Norwegian interest rate stood at 5.6 percent, but was cut to extremely low 1.25 percent in 2009 to support economic growth. The danger, however, is in the attempts to drive the interest rate back. Returning rates to more normal levels, which seems like just a matter of time, the bubble could burst, cutting back disposable income, damaging undercapitalized banks, lowering retail spending and slowing growth. (Reuters, 2 February, 2012). Similar problems persist not only in Norway, but in other Scandinavian countries as well. In Sweden, for instance, housing interest rate dropped from 6 percent to 3 percent in 2008, and adjustable mortgage rates fell to under 2 percent. Tommy Waidelich, the Social Democrats' economy spokesman, warned that Sweden may have a housing bubble and that "A drop in house prices would hit growth, employment and state finances." (Seeking Alpha, 12 February 2012). Also, according to Waidelich, the reason why Swedish housing prices are not dropping is speculation. Investors are holding onto their houses thinking that they will be able to sell their property for profit shortly. However, the speculation is baseless, as no factors seem to justify such thoughts. The housing situation is no better in Finland, where 90 percent of loans are of the highly dangerous adjustable rate variety. Moreover, the government is pushing its reverse mortgages onto elderly customers and is encouraging borrowing. (Seeking Alpha, 12 February 2012).