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What effect would a sovereign default of a European country (i.e. Italy/Greece) have on house prices of the same country that goes in default?

What does the previous literature says about similar cases? (i.e. Argentina)

I heard that a country default might lead to a huge inflation in such country, (I can't guess what could happen to Greece/Italy if they have to move out from Euro) therefor, if you live in one of these countries, could buying an house be a way to preserve the value of your money from such inflation?

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Marco Demaio
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2 Answers2

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It could be a a way to preserve the value of your money, but depends upon various factors.

If a country defaults, and it leads to hyper-inflation, by definition that means that money loses its purchasing power. In even simpler terms, it cannot buy as much tomorrow as I could today.

Therefore people can be incented to either hoard physical goods, or other non-perishable items.

Real-estate may well be such an item. If you are resident in the country, you have to live somewhere. It is possible that a landlord might try to raise rent beyond what your job is willing to pay. Of course, in a house, you might have a similar situation with utilities like electricity...

Assuming some kind of re-stabilization of the economy and currency, even with several more zeros on the end, it is conceivable that the house would subsequently sell for an appropriately inflation adjusted amount, as other in-demand physical goods may.

Lots of variables. Good Luck.

sdg
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Some of the factors that will act on house prices are:

  • There will likely be a recession in that country, which will lower incomes and probably lower housing prices.

  • It will likely be harder to get credit in that country so that too will increase demand and depress demand for housing (cf the USA in 2010.)

  • If Greece leaves the Euro, that will possibly depress future economic growth, through decreased trade and investment, and possibly decreased transfer payments.

  • Eventually the budget will need to come back into balanced which also is likely to push down house prices.

  • In some European countries (most famously Spain) there's been a lot of speculative building which is likely to hang over the market.

  • Both countries have governance and mandate problems, and who knows how long or how much turmoil it will take to sort that out.

  • Some of these factors may already be priced in, and perhaps prices are already near what will turn out to be the low.

In the Euro zone you have the nearly unprecedented situation of the countries being very strongly tied into another currency, so the typical exchange-rate movements that played out in Argentina cannot act here. A lot will depend on whether the countries are bailed out, or leave the Euro (and if so how), etc. Typically inflation has been a knock-on effect of the exchange rate moves so it's hard to see if that will happen in Greece.

Looking back from 2031, buying in southern Europe in 2011 may turn out to be a good investment. But I don't think you could reasonably call it a safe defensive investment.

poolie
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