First it was the US. Then Britain. Now the holiday-home price boom may be over

  • @emilydugan

When the property rush to the costas began, it seemed like a win-win bet for thousands of Britons: a low-cost investment promising great returns and a place to escape the British gloom. But the attraction of owning a holiday home in Europe has lost its allure, with continental property now heading into freefall.

The value of property across Europe is set to take a dramatic downturn in 2008, according to the Royal Institution of Chartered Surveyors (RICS), which claims the Continent's long-running housing boom is collapsing. In 2007, many European countries experienced either a dramatic drop in house price inflation or actual falls, the RICS annual European housing markets survey said.

About 300,000 Britons have a second home abroad, and many of these properties are in countries hit by the latest inflation falls, such as Spain and France.

And as the market collapses in the costas, house values in the once-buoyant Eastern bloc countries have taken an even greater dive. Property prices in Poland and Estonia took a severe tumble after price rises in early 2007. In Estonia, some properties fell by as much as 40 per cent.

The credit crunch is partly to blame, according to the RICS, but the report said rising interest rates were the chief cause of the slowdown, which is much more severe than in the UK. Owners with variable rate mortgages experienced a sharp rise in their rates after the European Central Bank raised their rates from 2 per cent in 2005 to 4 per cent last year.

The author of the report, Professor Michael Ball, of Reading University, said yesterday: "The big reason for the slowdown was rising mortgage rates, which were slowing demand." He believes the trend will continue into 2008 but will not be on the scale of the crash in the early 1990s.

Given the continued downturn, Professor Ball recommends that those considering buying second homes should think carefully. "Unless you've found a bargain or the home you've always wanted, it would not be a good idea at the moment," he said.

And for those who already have second homes, he said the best thing to do is hold on.

But Kenneth Taylor, from Inverness, is one of many Britons who cannot afford to wait. After being hit by ever escalating mortgage payments, Mr Taylor is hoping to sell his two bedroom apartment on the Costa Del Sol. But he is concerned he may not cover his costs on the property, which he bought in 2005.

"It was lovely there but we took out quite a large mortgage on it, and now it seems a bit over the top,"he said. He and his family are looking for a quick sell, partly as a result of rising costs.

"We took out a Spanish mortgage in Euros to buy it and now the Euro has strengthened against the pound, which has made the repayments much more costly. We're hoping to make a 5 per cent profit on what we paid, but the prices have stopped rising."

More than four million new homes have been built in Spain in the past decade and price growth for property has slowed to about 3 per cent. According to Ian Cunningham, sales manager at the Costa Del Sol branch of Escape To Spain, that is likely to cause problems for Britons trying to sell their properties.

"There's been an oversupply of one type of accommodation, with developers building lots of apartments in complexes with pools to target the tourist market, and a lot of that hasn't sold," said Mr Cunningham. "It will take a long time to clear that backlog, and individuals trying to resell their property are struggling because developers have a lot of stock to clear and can hold the prices."

The story for Britons with property in France is all too similar. French house prices rose by about 3 per cent last year, less than half the increase of 2006.

It will come as alarming news for the many Brits with second homes there, but Georgina Caldwell, deputy editor at French Property News insists that things are not as bad as they seem. "I would be hesitant to describe this as a downturn," she said, "More this is a steadying of the market, a normal state of affairs for the French market. Prices were low thanks to over-supply and the fact that the locals were largely uninterested in the old, dilapidated stone housing stock.

"Supply and demand have now evened-out [thanks to France's high birth rate and immigration] and a high percentage of older properties have been restored."

British homes look more secure, as the UK's housing market was described as "one of the strongest in Europe during most of 2007". Unlike many of its European neighbours, Britain only experienced a slight slowing in the market. Year end prices were up by about 8 per cent – the highest of all the major EU economies.

In Ireland the situation looks much less stable. After one of Europe's biggest housing booms of the 1990s, they had one of the worst performing markets last year, falling by about 7 per cent.