European real estate bubble slowly deflating

March 4, 2006

In 2005, United Kingdom real estate prices rose 3%, down from a 12% increase in 2004. Germany has been stagnant, which some investors see as a buying opportunity. While both of these countries' growth is lower than the growth in the rest of Europe - Denmark (22%), Spain (15%), Sweden (12%) and France (10%) - all real estate prices are expected to fall. This is in anticipation of the actions of the European Central Bank, which will continues to raise interest rates above their current 2.5%.

What It Means:
The European real estate markets, just as in the U.S., will slow next year, as central banks around the world try to mop up excess liquidity and prevent inflation. This is good, since a stable economic trend means less chance of a volatile decline in your portfolio.

Action Steps:
Look at your overall net worth in real estate - including equity in your own home. Now would be a good time to make sure you don't have more than 30% of your total net worth in hard assets, especially real estate. Consider downsizing your home, or selling some of your REIT assets and moving them into cash or foreign stocks and bonds.