Key Takeaways
- We have revised upward our housing price forecasts amid improved price resilience across the European market.
- Supply factors--in particular, the continuing high cost of building materials--are the main driving force behind the house price resilience, alongside a strong labor market, construction backlog, and government support. The relative importance of supply factors translates into an unusual decoupling of prices for new and existing homes.
- Despite this revision, we believe that the price correction is not yet over. Demand will continue to adapt to higher interest rates and slow down, while supply constraints will probably ease, barring a new shock on commodities.
- While some mortgage rates reflect the lower 10-year bond yields at the start of 2024, we do not think they will see a sustained downward trend before mid-year, because we expect central banks will cut rates later than markets are currently pricing.
European house prices proved more resilient than expected in 2023, leading us to change our forecasts for the housing market. The extent of our upward revisions varies greatly from country to country, and is most pronounced for the U.K., Ireland, and countries in southwest Europe such as Spain and Portugal. Meanwhile, only Germany and Sweden depart from the general trend toward greater housing price resiliency in 2023 (see table 1).
Table 1
The main driver for the change in our forecasts is improved price resilience across the European housing markets in the second and third quarters of 2023. Looking at the reasons behind this greater resilience, it seems that a mix of demand and supply factors are at play, with supply factors dominating.
Housing Demand Holds Up
New demand weakened less than expected. One reason is that the European labor market has held up better than anticipated, with the European economy creating 600,000 net jobs in the second and third quarters of 2023, while wage growth continued to accelerate. Several European governments have intensified their financial support to households, with net social benefits increasing and contributing 2 percentage points to the annual increase in household gross disposable income over the period in the eurozone (see "Economic Outlook Eurozone Q1 2024: Headed For A Soft Landing," published Nov. 27, 2023).
In some cases, lenders have also resorted to forbearance measures to cushion the interest rate shocks for households, therefore avoiding a crash in demand. As a result, housing affordability--especially for current owners with mortgage resets--and therefore housing demand deteriorated less than expected over the period, leading to few forced selling transactions.
What's more, even though new demand for housing is being held back by tighter financial conditions--new lending for house purchases has almost completely dried up since the European Central Bank (ECB) began raising rates by mid-2022, down to €16 billion in the past 12 months from €240 billion over the previous 12 months--the level of construction backlogs remains particularly high, keeping the price for new houses elevated. European companies estimate that they still have close to nine months of operations ensured by the current backlogs. The backlogs situation is, however, very different from one country to the next, with Italian companies--whose business has been boosted by the government's housing tax credit since 2021--reporting a record 16-month order backlog, compared with less than four months for Germany (see chart 1).
Chart 1
Supply Constraints Remain Key
In our view, supply has been the main factor behind the resilience of European housing prices over the past two quarters. The European Commission survey suggests that supply constraints remain the largest factor limiting building activity EU wide (see chart 2). While material and equipment shortages have eased in the past six months, the labor shortage remains acute, and contributed to higher construction costs in a labor-intensive sector. Another aspect is that the price of raw materials used for construction, such as cement, bricks, or manufactured windows, has not dropped from peak (see chart 3). As a result, construction producer costs in residential building increased through second-quarter 2023 and has only edged up in the third quarter (see chart 4).
Chart 2
Chart 3
Chart 4
This helps explain the current dichotomy between the evolution of prices for existing homes and newly built homes. The price of new homes is more directly affected by construction costs, and therefore affected less by changes in interest rates alone than existing homes. In our view, markets with a higher proportion of new-built dwellings are confronted with the biggest price rises between third-quarter 2022 and third-quarter 2023 (see chart 5). Note that our price forecasts cover the entire housing stock, so they are a weighted average of new and existing homes.
Chart 5
Prices Continue To Adjust To Higher Interest Rates
The better-than-expected resilience of European house prices in the second and third quarters of 2023 does not mean that the adjustment of prices to higher interest rates is over. On the contrary, we think that the bottom of the house price cycle is still ahead of us. We assume in our baseline scenario that central banks won't start cutting policy rates as early as financial markets are anticipating; we expect European central banks in developed Europe to wait until mid-year rather than start cutting in early spring. This means that we are not convinced that the recent decline in 10-year yields is sustainable. Mortgage rates are still increasing in most of the countries this publication covers (see chart 6). In some countries, they reached a 10-year high. What's more, for many markets we cover, variable-rate loans or loans with a short interest-rate-fixation period dominated the newly issued loans in second-quarter 2022, before rate hikes (see chart 7). Consequently, the adjustment of mortgage rates to the new rates environment is probably not yet over.
We interpret the fourth consecutive month of outflows from European real estate funds up to November 2023 as a sign that investors do not believe the bottom has been reached in real estate prices (see chart 8).
Chart 6
Chart 7
Chart 8
Housing Remains Households' Greatest Wealth
As detailed in the last ECB bank lending survey, the current level of interest rates is the main factor weighing on households' demand for new mortgage loans. Households' mortgage debt as a percentage of their disposable income is now close to a historic high in many countries, while housing wealth represents more than half of households' assets (see charts 9a and 9b). Housing affordability, while better than expected, is declining. All this affects house purchase intentions and current construction order books, which are still negative according to the European Commission's latest survey (see chart 10).
Chart 9
Chart 10
Chart 11
If households' incomes are likely to benefit from further strong wages growth and disinflation, this is unlikely to brighten the housing market prospects this year. Indeed, we expect the European economy to create fewer jobs in 2024, and the unemployment rate is set to rise. Higher real mortgage rates and rising unemployment will weigh on housing affordability. Demand backlogs will continue to diminish while supply conditions should ease, likely reducing the current price gap between new and existing housing.
This report does not constitute a rating action.
| EMEA Chief Economist: | Sylvain Broyer, Frankfurt + 49 693 399 9156; sylvain.broyer@spglobal.com |
| Economists: | Aude Guez, Frankfurt 6933999163; aude.guez@spglobal.com |
| Marion Amiot, London + 44(0)2071760128; marion.amiot@spglobal.com | |
| Sarah Limbach, Paris + 33 14 420 6708; Sarah.Limbach@spglobal.com |
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