SERIOUS MONEY:The western world is in the throes of the greatest property boom of all time, which has seen the value of stock increase by more than $30 trillion over the past five years.

The wealth creation is almost double the losses incurred during the meltdown in world stock markets from 2000 to the end of 2002.

Unfortunately, the boom is at an end. The housing slowdown that began in the US last year has reached across the Atlantic and is now evident in Europe.

The rate of price increase in the euro zone decelerated from more than 8 per cent during the first half of 2005 to 6 per cent towards the end of 2006 and recent data confirms that the moderation continued during this year's first quarter.

The US housing market continues to deteriorate and the National Association of Realtors now believes that median house prices will decline this year, the first time this has happened since the 1930s.

This is unlikely to happen in the euro zone, given that Germany never participated in the upturn. However, a number of member of countries, including Ireland, are at risk, although Spain, where speculative excesses have been the greatest, is the most vulnerable.

Spain has benefited considerably from EMU membership, with economic growth outpacing the OECD average in nine of the past 10 years. Investors became convinced a decade ago that membership was virtually assured and the more than three percentage point premium attached to government bond yields relative to their German counterparts disappeared.

The sharp drop in borrowing costs provided considerable stimulus to the housing market, which was compounded by the removal of currency risk and the subsequent increase in the number of foreign buyers.

The resulting construction boom boosted not only economic growth but also the rate of inflation and the decline in real interest rates provided further impetus to the housing market. Indeed, borrowing costs were negative in real terms from 2002 to the autumn of 2006.

Nominal house prices soared by 175 per cent over the past decade and more than 140 per cent in real terms.

The party is now over. The European Central Bank's (ECB) seven interest rate increases since December 2005 are beginning to bite and more are on the way. The rate of inflation is moderating. Consequently, real borrowing costs have increased by more than two percentage points since last summer and could rise by a further percentage point before the ECB's tightening cycle is complete.

The potential impact should not be underestimated. Household debt as a percentage of GDP has soared from less than 80 per cent five years ago to more than 120 per cent today. Disturbingly, more than 90 per cent of outstanding mortgages are on floating rates.

Furthermore, home purchases for investment purposes have accounted for as much as one-third of market turnover in recent years and such speculative activity is sure to disappear as the market turns south.

The trend in house prices has already turned downward. House price growth slipped into single-digit territory during last year's fourth quarter for the first time since 1999 and the rate of increase slowed further during the first three months of 2007. Negative territory is a distinct possibility before the year is out.

The economic impact of a housing recession could be substantial. Construction's share of GDP has soared by more than six percentage points over the past decade to almost 18 per cent today and the sector employs more than 2.6 million people out of 20 million in employment.

Furthermore, the rate of housing output in recent years has been staggering. The annual rate of new household formation is roughly 500,000, well below the number of new houses coming to the market annually in recent years. More than 800,000 new houses were completed last year, of which roughly half are in coastal areas. It is clear that speculative excess is widespread and the stock of unsold homes is rising.

The Spanish economic miracle has been extraordinarily imbalanced. The construction sector has boosted economic growth by 0.75 per cent per year on average since 1998 and excessive domestic demand has contributed to a current account deficit that amounts to 9 per cent of GDP and ranks second only to the US in absolute terms.

The economy's credentials are set to be severely tested in the months ahead and a sharp slowdown if not outright recession within the next 18 months is virtually assured. Owners of coastal properties are in for a rough ride.

charliefell@sequoia1.ie