USA versus European Foreclosures Crisis

If at the beginning of 2007, apartments in the capital of Latvia, Riga, became more expensive than in Berlin, housing prices fell by 3.5% in June of the same year. That was after during previous months, prices had declined by 1%. In addition, many mortgages are not given in national currency, but in Euros, Swiss francs or Japanese yen. I mean, the population has assumed a significant currency risk, especially in this context of imbalances in the state. Impairment of the currency increases foreclosure mortgage loans. Currency risk can affect most customers of foreclosures mortgage.

For example, in Hungary, nearly 96% of the mortgage balance is given in Euros or Swiss francs. Similarly, in Romania, only 13% of the mortgage loans and property foreclosure loans are granted in lei.

In addition, in the case of most funds in foreign currency, customers are not protected against currency risk. I mean, people who request a credit in Swiss francs to benefit of a lower interest rate, do not gain income, usually in the same currency, but in local currency. Moreover, in the case of an increase of exchange rates, they increase directly proportional.

For example, from the end of July until the end of August 2007, the Hungarian forint depreciated by almost six percent, while the Polish zloty lost a little over two percent, while the Romanian depreciated by around three percent. For comparison, a part of the mortgage customers of the Western Europe risked to face foreclosure because of the fact that the European Central Bank increased over about two years, the key interest rate from 2% to 4%.

There are many statistics lacking transparency. Besides the risks associated with foreclosures mortgage from Central and Eastern Europe, funds that generated, especially increasing cost of real estate assets, the real estate market also faces lack of transparency. Thus, the only data available about the evolution of real estate prices are offered either by intermediaries on this market, or by the developers.

For example, in Hungary, the number of new dwellings, which have not been sold, has increased significantly. Nevertheless, some developers argue that the figures are distorted, because they include projects that have not been finalized yet.

In addition, in Bulgaria, the rate of increase in housing prices differs from one agency to another. Moreover, low reliability of data that characterizes the real estate market in Central and Eastern Europe has been highlighted since the previous year by the Association of investment managers in Ireland. Besides, in Romania, representatives of the real estate market have started to think of possible price corrections of property assets, after they announced increases for the next five years.

Moreover, the National Bank drew attention to companies with high share in the growth of real estate assets, which have significant foreign exposure that they may cause adverse developments on the real estate market, in case of withdrawal of funds or short-term shocks of the exchange rate.

There are indicators that may signal an increase of prices of speculative real estate sector. Analysts from Royal Bank of Scotland have built a list of criteria that could signal a price increase in the speculative real estate area.

                                                

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