Our short-term housing price forecasts improved.  We revised upward our price forecasts for 2024 for most European countries, especially Belgium, Portugal, and Spain. This is because the European labor market was more resilient than we expected, meaning prices were more resilient at year-end 2023 than we anticipated and housing loans recovered faster than they did in previous cycles. On the other hand, we continue to expect a moderate rebound in prices over the medium term. Our forecast for 2027 is in line with that for 2026 (see table 1). Our forecasts are based on our expectations of slow population growth, a robust European labor market, and real interest rates that remain stable over the long term.

Table 1

Housing price dynamics remain uneven across Europe.  While the price correction accelerated in France in the first half of 2024, it slowed in Germany and Sweden, where the correction had been most pronounced in 2023. While housing prices have stabilized in the Netherlands, they continue to increase steadily in about half of the countries we cover in this report, with Portugal and Spain taking the lead (see chart 1). These differences, which are based on several demand and supply factors, often reflect idiosyncrasies. Contributing factors include:

• Mortgage financing, with variable-rate mortgages being more sensitive to changing financing conditions than fixed-rate mortgages;
• Housing stock and housing quality;
• Construction costs, demographics, the labor market, public housing subsidies, and overvaluations during the COVID-19 pandemic; and
• Housing types. New builds continue to sell at higher prices, while the prices of existing homes decline further. Stricter thermal insulation standards and the sharp increase in construction costs due to high material and labor costs contribute to this dichotomy. Notable exceptions at year-end 2023 included Germany and Italy, where the prices for new and existing homes are falling, and the Netherlands and Portugal, where the prices for new and existing home prices are rising.

Chart 1

European Housing Prices Are About To Bottom Out

The correction in European housing prices will end earlier than we expected.  After an 18-month-long contraction, growth in new mortgage loans has turned positive in the eurozone, the U.K., and Sweden. It resumes at a pace that is similar to the period before 2022, when central banks began raising interest rates. The recovery in mortgage loans coincides with the interest rate cycle (see charts 2 and 3) and happens about six months earlier than the econometric analysis of past cycles suggested. This means the maximum effect of higher rates on loan demand has materialized 12-18 months after the first rate hike. We believe the strong European labor market and the recovery in household incomes contribute to the faster-than-expected recovery in the demand for housing loans.

Chart 2

Chart 3

Housing activity has not recovered to the same extent as housing credit.  That said, the housing activity indicator of the Purchasing Managers' Index for the construction sector is stabilizing at low levels for the eurozone and even reached the expansion threshold in the case of the U.K. (see chart 4). This indicator suggests that housing activity increases in Ireland, while it eases in Germany but not yet France and Italy. Similarly, the pace of contraction of building permit issuances in the first quarter of 2024 more than halved to 11% in the eurozone (from 24% in the same period in 2023) and 21% in Sweden (from 58% in the third quarter of 2023).

Chart 4

European Housing Markets Benefit From Economic Tailwinds

Most European economies resumed growth in the first quarter of 2024, after several quarters of stagnation or contraction.  This return to growth is largely a terms-of-trade effect: The decline in energy prices and inflation, coupled with central banks' rate cuts or willingness to do so, reduced financing costs--and with inflation falling, consumer confidence is returning. Barring any new shocks, economic growth will likely continue to strengthen through 2025. We expect housing investments will pick up from 2025, when interest rates will have fallen further.

Our baseline assumptions include a continuously robust European labor market.  In light of diminished productivity, labor costs--which have become the main driver of inflation--could reduce employers' willingness to hire new workers and even lead to layoffs. It is worth noting in this regard that employment rates affect housing investments and non-performing loans. For now, however, the European labor market is only cooling but not collapsing. Wage growth is slowing and unemployment rates across Europe remain close to record-low levels. We will continue to monitor the development of the European labor market closely.

Pressure on the European labor market has eased sufficiently for core inflation to recede and central banks to cut rates (see charts 5 and 6).  The Swiss National Bank, De Nederlandsche Bank, the Riksbank, and the European Central Bank (ECB) have already cut rates, while the Bank of England (BoE) will likely follow suit, potentially in August 2024. That said, the rate cutting cycle will be moderate and gradual, considering that GDP growth and inflation are expected to return to their respective targets only by June 2025. We foresee another two rate cuts from the ECB this year and three more in 2025. In comparison, we expect three rate cuts from the BoE this year and five more in 2025. The ECB's deposit rate and the BoE's base rate could bottom out at 2.5% and 3.0%, respectively.

Chart 5

Chart 6

The Demand Is There

We continue to expect a moderate rebound in housing prices over the forecast horizon.  Mortgage rates will probably continue to fall as central banks cut rates but will remain higher in real terms than they were before the pandemic. Real wages are set to rise further over the forecast horizon but we expect less job creation. It will therefore take some time for the link between house prices and household income to normalize, after it suffered from the double shock of the pandemic and the energy crisis. Still high relative prices, positive real interest rates, and the prospect of slower job growth offset the benefits of falling nominal rates and rising purchasing power. Together, these factors will translate into a subdued, albeit improving, house-buying demand across Europe over the next 12 months.

Structural housing demand exists.  In most countries covered in this publication, the share of households living in overcrowded properties has increased over the past decade (see chart 7). Additionally, increasingly stricter thermal building regulations will continue to shift demand from existing to new homes. All this suggests that housing demand will increase moderately. On the supply side, construction costs have eased significantly, compared with the peak they reached in 2022, but remain higher than before the pandemic, mainly due to staff shortages (see chart 8). We expect the combination of these demand and supply factors will lead to a moderate rebound in prices.

Chart 7

Chart 8

Related Research

• Economic Outlook Eurozone Q3 2024: Growth Returns, Rates Fall, June 24, 2024
• European Housing Prices: A Sticky, Gradual Decline, Jan. 11, 2023

Research Contributor: Paul Ulbrich.