European housing markets need to see more repossessions next year to bring limp credit markets back to life, or months of mortgage scarcity could morph into years of stunted house prices, fewer sales and more costly home loans.
Europe has largely escaped the wave of foreclosures that has dogged the US, but experts say lenders could hasten an end to Europe's housing hangover if they called time on their most troubled mortgages to free up funds for stronger borrowers.
"Many banks have already posted losses on their books well below the prices they could sell assets for today," said Stuart Law, chief executive officer of property investment boutique Assetz.
"They should be able to turn a good profit when they do decide to start churning their portfolios," he said.
The US housing market is taking baby steps towards a recovery after years of plunging prices but only after lenders ordered millions of foreclosure filings against indebted homeowners.
A similarly vast wave of foreclosures would hurt Europe's recovery, experts say, but a smaller burst of sales may aid price discovery and lift credit flows between borrower and bank.
"We share the opinion that average house prices have not moved sufficiently to remove the froth from the market but that doesn't mean another bubble is in the making, it just means prices could move downwards for a very long period of time," said Moody's Investor Service economist Nitesh Shah.
"This kind of gentle correction could be aided by a slow trickle of repossessions which could promote transactions without destabilising the system - subject to sufficient buyer demand to purchase these assets from the banks," Mr Shah added.
The European Central Bank has been the key source of support for liquidity-strapped banks since the crisis, accepting various types of securities, including risky and structured credit, as collateral to pump liquidity back into lenders.
However, Francesco Papadia, ECB's director general of market operations, warned in June the ECB could not be a crutch for the market indefinitely, citing fears it had weakened incentives to lend in efforts to shore up ailing banks.
Other experts said banks could only protect struggling homeowners because lower financing costs had reduced mortgage repayments, and interest rate rises could spur repossessions, said Liam Bailey, head of residential research at Knight Frank.
Moody's Mr Shah said banks needed to source new funds so they could both lend and stockpile capital at the same time, or they could worsen the credit logjam they aspire to fix.
"Ironically, the fact that banks have made credit supply much tighter than a few years ago means they are struggling to shift the properties they themselves are trying to sell."
In France, new lending fell 43.5 per cent in first-quarter of this year, year-on-year, compared with Spain and Ireland, where new lending slumped 34.1 per cent and 68.1 per cent respectively.
Knight Frank's Global House Price Index shows house prices in Scandinavia rose 3.6-5.3 per cent in the June quarter. Prices rose 2.1 per cent in Switzerland, 1.7 per cent in Portugal and 1.1 per cent in the UK.
"The speed at which we're going to see distressed pricing move in the next few months will be startling. In the UK, the banks could move rapidly from a 20 per cent loss on a loan to a five-15 per cent gain on some property," said Assetz's Mr Law.
He said the firm has been selling property on behalf of several banks at an average 45 per cent discount on 2007 prices but with profit margins of up to 35 per cent stripped out, banks were only losing about 20-25 per cent of their loan by exiting.
As soon as discounts in popular markets like Britain moved from 45 per cent to 20 per cent, Mr Law said the chase for bargains could turn to other markets like Spain and central Europe.
"We have 1,000 new cash-rich investors registering each month with us to buy residential property. We think there could be quite a feeding frenzy if banks are ready to exploit it."