Don't panic. While the gogo days are probably over, there's little evidence yet that the return of some semblance of sanity to European property prices imperils the outlook for growth in the same way as the US meltdown might crimp the world's biggest economy.

There are certainly some worrying signs of weakness in Europe. Mortgage arrears, or delinquencies, are climbing, based on an analysis of the third-quarter performance of European mortgage-backed bonds by credit-rating company Fitch Inc.

Arrears in Spain, for example, surged almost 31% in the third quarter from the previous three months, although the overall percentage of borrowers at least three months behind in their payments is still low at 0.34%.

"The highest arrears are being seen in transactions from 2006, backed by high loan-to-value loans from specialist lenders, " Fitch said.

"More recent vintages are expected to see higher arrears and defaults in future."

The UK saw the second-biggest jump in arrears, with late payments on so-called non-conforming mortgages . . . those with non-standard characteristics, similar to Alternative-A loans in the US. . . jumping 7.7%. Arrears rose 4.9% in Italy, 2.7% in Ireland, and 2.4% in Germany.

"In all jurisdictions, the effects of central bank interest rate rises are being seen through increased arrears levels, " Fitch said. The European Central Bank's benchmark rate has doubled to 4% in the past two years, while the Bank of England raised its key rate to 5.75% from 4.5% in the same period.

In Spain, the euro region's fourth-biggest economy, prices are still rising, though at a third of the rate seen two years ago. House values climbed 5.3% in the third quarter from the second, down from an average gain of almost 11% in 2006 and below the 15.5% increase in the first quarter of 2005, the earliest period for which figures are available.

Even a "cautious" analysis suggests prices are overvalued by about 30%, according to a Deutsche Bank study published last week by London-based economist Susana Garcia-Cervero and Madridbased analyst Daniel Gandoy Lopez.

Fixed-rate mortgages account for less than 1% of the Spanish market, the report said. Most home loans are tied to 12-month euro money market rates, which have surged to about 4.6% from 3.85% a year ago and less than 2% in mid-2003.

"We calculate that even under very conservative assumptions, from 2007 the economy could face a cumulative loss of almost 7% of gross domestic product, " the Deutsche Bank authors wrote.

Construction accounts for about 11% of the Spanish economy. Still, a recession in Spain is "a rather unlikely scenario in the next 18 months, " they said.

In Ireland, house prices dropped 1.9% in August and 0.7% in July, the first declines in at least 10 years, halting a boom that saw values climb 9.5% in February, 7.4% in March and 5.1% in April.

Mortgage lending, meantime, grew an annual 16.1% in September, the slowest pace in a decade.

"The notion that Irish housing activity is in the throes of a serious slowdown which will cause a large drop in employment in the construction sector, with adverse consequences for growth in the wider economy, is now virtually an article of faith, " Dermot O'Brien, chief economist at NCB Stockbrokers, wrote in a research report last month.

Ireland's unemployment rate ticked higher in September, to 4.7%, from an average of 4.6% in the second quarter, leaving it well below its 20-year average of 9.4% and in line with its five-year average of 4.5%. Construction accounts for about 12% of the economy, with new housing contributing about 6.5%.

A collapse in the construction industry would suggest the labour market should have had a much faster pace of job losses, O'Brien wrote.

"The scenario in which a lower level of housing activity punches a big hole in the Irish growth story is untenable, " he wrote.

In the UK, figures showed house prices falling for the first time in two years last month. Research group Hometrack said this week that the average cost of a home in England and Wales declined 0.1% from September.

The drop, though, mostly reflects waning demand in central London, where banking bonuses have driven prices sky high in recent years. The Council for Mortgage Lenders predicts UK prices will still grow next year, albeit by just 1% compared to 7% this year.

"Ireland and Spain will take the most significant direct hits, while the UK's more diversified economy, which is currently experiencing a less stark moderation in houseprice and construction-sector growth, should weather the storm to a greater degree, " Trevor Cullinan, a sovereign credit analyst at Standard & Poor's in London, wrote in a report last month.

The word "decoupling"will be bandied about a lot in the coming months as economists debate the implications of a US slowdown for the rest of the world. In Europe, at least, the outlook for the housing market doesn't threaten to invoke the ghost of recession, no matter how bad the US story gets. (Bloomberg)