The European real estate market is expected to enter a phase of downward correction this year. This phase will last three years, according to a study by the National Bank of Greece’s Strategic Planning and Research division. According to the study, the rise in housing prices over the last couple of years in the eurozone countries, but also seen in the UK and the USA, combined with low interest rates, indicates a situation ripe for a downturn. In Greece, this correction began, slowly, in 2001, in the most expensive areas of Athens, and may now accelerate. But Greece was an exceptional case in that its housing market – in sharp contrast with other European ones – had never experienced a full cycle of ups and downs, with prices constantly rising instead. The study does not expect a violent downturn, but rather a gradual one, both in the eurozone and in the UK. In Britain and the USA, the ratio of a house’s value to the rents paid, a measure similar to that of the price/earnings ratio for stocks, is 30 percent and 14 percent above the long-term average, respectively. In the eurozone, the ratio is 17 percent above the long-term average. On the basis of these numbers, the National Bank study expects an average annual decline in eurozone housing prices of 1.5 percent over the next three years. If one excludes Germany, where prices will be constant or rise slightly, the average eurozone decline rises to 4 percent. This correction may seem beneficial to would-be buyers but will negatively affect, in turn, economic growth. This, the study explains, is because high housing prices produce a wealth effect on their proprietors who, consequently, spend more. According to the study, the effect of lower housing prices will be of a magnitude of 0.3 percent annually over the next three years. This is bad news for the eurozone, where growth in 2002 did not exceed 1 percent. This weak economic environment, analysts say, will oblige the European Central Bank (ECB) to lower its rates even more to give a boost to the economy. According to the National Bank study, the ECB will lower its reference rate by 25 basis points (0.25 percent) within the second quarter of 2003. A further 0.25 percent reduction by the end of the year, to 2 percent, appears quite likely.