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House prices will experience a correction in most of Europe during 2023 and in some countries also in 2024, in a context of interest rate hikes by central banks, although there will be no market collapse, according to the agency S&P Global Ratings, which indicates Portugal (-4.4 %), the United Kingdom (-3.3%), Spain and the Netherlands (-2.5%) as the countries where the most intense nominal falls will be recorded.
Likewise, for next year, the agency expects Spain to be the European market analysed, along with the German, where house prices will fall the most in nominal terms, although the estimated drop in 2024 was limitedwill rise to 1%, while for 2025 it projects a slight rebound of 1.5%.
In this sense, Sylvain Broyer, chief economist for Europe, the Middle East and Africa (EMEA) at S&P Global Ratings has pointed out that there is “little to no prospect of a strong rebound until 2025”.
In his analysis, S&P considers it likely that both housing and investment prices will be affected by rapidly rising mortgage rates, although he stresses that it will take time for the market to fully adjust to higher interest rates, with some countries taking longer than others.
So far, the agency highlights that house prices had barely adjusted to higher interest rates, likely reflecting supply constraints rather than declining demand, and they continued to rise at a steady pace through the first half of 2022 at an average of 10% per year across the 12 European countries analysed.
“We have observed that the adjustment to higher interest rates can last up to ten quarters and is usually twice as pronounced as after a low rate regime,” Broyer explained, although historically it has been shown that house prices in Europe are quite inelastic to the downside.
In this sense, the agency has updated its expectations regarding the evolution of interest rates and now predicts that the European Central Bank (ECB) will raise the deposit rate to 3%compared to 2.25% of the forecasts last November, while it sees it unlikely that rates will be cut before the end of 2024, which will translate into higher mortgage rates in some countries.
Nevertheless, despite the fact that in nominal terms mortgage rates have risen rapidlyreaching their highest level in a decade or so, in real terms, adjusted for inflation, are still negative and are likely to stay that way until mid-2024.
It also points out that the impact of interest rate hikes in housing and investment prices can also vary from country to country, reflecting differences in housing markets in Europe, with a more severe and accelerated effect in countries with a higher share of variable-rate mortgages, This leaves Sweden and Portugal more exposed to a rapid price adjustment.
Demand Support Factors
On the other hand, apart from the impact of the evolution of interest rates, S&P points out that there are factors that can also support the demand for housing in Europeincluding an improved financial position for households supported by record levels of employment, wage increases and the remaining savings from government support received during the pandemic.
Thus, the agency highlights that the current salary trends suggest that household purchasing power could recover as soon as early 2024.
It also warns that the population increase caused by the influx of refugees from Ukraine has already increased demand for housing, while it is not yet clear whether household preferences for housing have changed durably due to the pandemic.
