The revival of property markets in Europe relies on the ability of governments to cope with the mortgage credit shortage, according to a report by Michael Ball, professor of Urban and Property Economics at the Department of Real Estate and Planning at the Business School at Reading University.

Significant reductions in mortgage lending due to the credit crunch along with the global economic downturn has severely depresses demand for residential property across Europe. His report for the Royal Institution of Chartered Surveyors (RICS) show that the Baltic States experienced the sharpest falls, with Estonia down -23%, followed closely by the UK which saw a drop of -16%, Ireland down -9% and Norway dropping -8%.

Even those economies that did not experience a boom in house prices have not been spared from the squeeze in the property market. In Germany and Austria, a lack of credit has hit demand and further moderate falls in house prices and activity are expected in 2009. Meanwhile in Italy sales declined and for the first time in more than a decade mortgage growth was negative in 2008.

Though official indices in Spain surprisingly recorded only moderate price falls through the year, the dramatic effects of the credit crunch on mortgage availability and the ending of a consumer boom are likely to lead to a more material readjustment of prices in 2009. In addition, the worsening global economic climate will lead to a further deterioration in the Spanish second homes sector, the report warns. In France, transactions of existing homes fell by -30% in 2008 and prices are expected to continue to slide in 2009 as a result of the weak economy.

In Central and Eastern Europe, the financial turmoil hit residential markets very hard. In Hungary transactions fell by 10-15% in 2008 and house prices declined in all major Polish cities during 2008. Continued constraints on mortgage availability and the rising cost of foreign currency loans may lead to further falls.

The nationalisation of some of the major mortgage lenders in the Netherlands and Belgium, such as Fortis bank, has had a significant impact in those countries’ housing markets, which could lead to a further weakening of prices.