A bubble in the American housing market — fueled in part by subprime mortgages — was the catalyst for yesterday’s financial market turbulence.

But the bubble was not confined to America. In Europe, house prices have also increased sharply over the last decade — more dramatically than in America in many cases. The same is true of other OECD countries and emerging markets, where rapidly increasing incomes have put pressure on asset prices.

Indeed, with a few exceptions, essentially Germany and Japan, housing prices have risen almost everywhere to levels never seen before. How could such a global pattern emerge when real estate is the most local of all assets?

Recent research suggests that the global housing boom was closely linked to the unprecedented increase in the supply of liquidity by major central banks. To be sure, financial innovation, like lending to buyers who would not normally have qualified for mortgage loans, subprime borrowers, also played a role. But subprime mortgages would probably not have been supplied on the same scale if central banks had not created an environment of ample liquidity and persistently low interest rates.

The subprime crisis has so far affected mainly financial markets in America and Europe. This is not surprising if one considers that on both sides of the Atlantic prices have reached historical peaks and, until recently, had accelerated.

This is no mere coincidence. There has always been a correlation between American and European house prices. Over the last three decades, prices in America and Europe have tended to follow three slow-moving, related boom-bust cycles. All previous peaks were followed by several years of declining prices (in real terms). There is no reason to assume that this cycle will be any different.

Since last year, prices have declined in America. Because data for the euro area will become available only much later, it is not yet possible to determine whether prices have already turned on the continent as well. But if the past pattern holds, house prices should start to fall very soon in continental Europe as well.

In both the U.S. and Europe it seems that prices went 20%-30% above their longer-term average values. Such a large overshooting is likely to be followed by some undershooting. This would imply that prices will probably have to fall at least by 20% to 30%, but possibly considerably more before they find a bottom.

European policy makers thus have cause for concern. While there is little evidence in the euro area of large-scale subprime lending, there is considerable evidence to suggest that house prices have an important impact on domestic demand, albeit with wide variations among individual countries. Almost everywhere, higher house prices have been associated with strong consumption. Lower house prices throughout Europe are thus likely to be accompanied by weaker consumption demand, as in America. In Germany, for example, house prices have remained relatively low and consumption weak.

The impact of house prices on construction activity has been more varied. In Spain and Ireland, construction investment has increased to a level, 18% to 20% of GDP, far above that of the U.S. and not seen in any other OECD country except Japan before its bubble burst in 1989. In these two countries, lower housing prices are likely to be associated with a sharp and prolonged drop in domestic demand, which should be stronger even than what can be expected in the U.S.

By contrast, in France and Italy, where house prices have increased almost as much as in America, there is no evidence of a housing overhang. The negative impact of a downturn in housing prices in these two countries should thus be limited to a drop in consumption. Germany should be affected the least, because both house prices and construction activity have been below trend for some time.

In short, the downturn in house prices will not be limited to America. And, on both sides of the Atlantic, that decline is likely to undermine consumer spending.

Mr. Gros is director of the Center for European Policy Studies in Brussels. ©2008 Project Syndicate.