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http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/03/28/cnfrance28.xml

French property construction plummeted 15.1pc in February and home prices have begun to slip in the first sign that America’s housing woes are spreading to Europe.

The surprise data came as the US Conference Board’s confidence index fell sharply from 111.2 to 107.2, suggesting that housing troubles are starting to unnerve American consumers.

The Dow Jones was off 75 points to 12,394 in jumpy trading, while the dollar renewed its downward slide.

French house prices have shot up by 210pc since 1995, compared with 190pc in the US, much to the delight of 180,000 Britons with second homes across La Manche. But after years of double-digit gains the pace slowed to 7.2pc last year and turned negative in January with a fall of 0.6pc.

“The market has turned in France, and this is the trailer for the movie we’re are going to see across Europe this year,” said Jean-Paul Six, chief Europe economist for Standard & Poor’s.

“I think we will see falling house prices in France in coming months and that is going to cause headlines. It is the delayed effect of rising interests rates, which have already gone up seven times to 3.75pc, and are going up further.

Spain, Ireland, Scandinavia, Holland and Italy – as well as Britain – have all enjoyed housing booms, with much of Eastern Europe playing catch-up. The big exceptions have been Germany and Switzerland, where property has been flat for a decade.

More than 93pc of mortgages in Spain are on floating rates, making the country vulnerable to Europe’s monetary squeeze.

“I can see a mortgage crisis building. We have a serious property bubble in this country and everyone is in denial; it’s worse than the US” said Manuel Romera, director of Madrid’s Instituto de la Empresa.

Spanish house prices have jumped 270pc in a decade, even though more houses are being built there than in France, Germany, and Italy combined. The central bank has warned repeatedly that the market is overheating, but it is virtually powerless to stop it after Spain joined the euro and gave up control over monetary policy.

France looks subdued, by comparison. Almost all mortgages are on fixed rates, and tough lending rules have prevented the emergence of a US-style sub-prime market. French banks usually restrict lending to 75pc of the home’s value.

The ratio of household debt to disposable income in France is a modest 65pc, compared with 115pc in Spain, 146pc in Britain, 171pc in Holland, and 190pc in Ireland.

Even so, Mr Six said France was vulnerable to an emerging glut of houses after record contruction of 420,000 new homes last year.

According to France’s OFCE research institute, house prises are 25pc overvalued.

“If there is a property crash across the Atlantic, there could be contagion to Europe,” it said.

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