Key Takeaways
- Nominal house prices recovered rapidly in 2024 as housing affordability improved. This led to upward revisions in our price forecasts. We now expect house prices in the countries covered in this publication will increase by almost 3% per year on average over 2025-2027.
- Idiosyncratic factors in countries such as Italy, Portugal, the Netherlands, Spain, and Ireland accelerate the recovery in these housing markets.
- We expect easing monetary policies will mitigate the risk of rising mortgage rates, despite recent increases in long-term yields across Europe. The correlation between mortgage rates and policy rates remains strong.
Nominal house prices are recovering quickly. We have, once again, revised upward our house price forecasts for 2025 and, to a lesser extent, 2026. This is because the recovery of European housing markets in 2024 was faster and more pronounced than we had expected, particularly in Italy, the Netherlands, Ireland, and Spain (see table 1). Limited supply, weaker housing investments, and recovering demand contributed to the rapid recovery in house prices across Europe. Supply capacity remains constrained by labor shortages, although companies report some improvements. Demand benefits from a recovery of household incomes, population growth in most countries--particularly in urban areas--record employment levels in most European economies, and lower household debt.
Table 1
We expect house prices in the countries covered in this publication will rise by an average of almost 3% per year over 2025-2027. Mortgage rates continued to moderate through fourth-quarter 2024, while stricter construction standards to meet energy efficiency requirements spur the construction of new homes. We forecast that these factors will continue to play out over the next couple of years and increase demand, while supply constraints are likely to ease. The expected slowdown in house price increases in 2025, compared with 2024, largely reflects a base effect. House prices decreased over 2022-2023 and bounced back rapidly in second-half 2024, leading to a strong acceleration in year-over-year growth (see table 1). We expect quarter-over-quarter growth in 2025 will be similar to the growth in second-half 2024.
The pace of recovery differs across countries. House prices in Europe recovered fastest in Italy, Portugal, the Netherlands, Spain, and Ireland in 2024. These countries stand out because of idiosyncratic factors:
- In Italy, the effects of the Superbonus tax credit scheme are subsiding, leading to a normalization in demand. This is demonstrated by the rebound in the price of existing houses. Given the decline in the working-age population, labor shortages have eased to a lesser extent than in other countries (see chart 1). Employment has never been higher and household debt, relative to income, has reached its lowest level in a decade.
- In Portugal, construction permits increased to 2009 levels. Yet the additional supply backlog, exacerbated by years of underinvestment, cannot keep up with demand, especially in densely populated areas. The housing market also benefits from foreign demand.
- In the Netherlands, the mortgage interest deduction and the exemption from transfer tax for first-time buyers has potentially fueled an already structurally high demand for housing, to the point that the Dutch National Bank has recommended that these tax incentives be reduced.
- In Spain, the strong labor market not only lifted household incomes but also improved housing affordability. We note that the level of mortgage debt in the Spanish housing market is historically low (see chart 2) and that variable-rate mortgages have largely been abandoned in favor of fixed-rate mortgages.
- The Irish housing market differs from the rest of Europe. House prices have only corrected in real terms due to the lack of supply, high immigration in recent years, and the strong labor market.
Chart 1
Chart 2
Better Housing Affordability Will Support Demand
Since 2019, house prices in Europe have climbed by an average of 25%, despite the recent correction in 2022-2023 triggered by central bank rate hikes. This means the increase in house prices exceeded the rise in consumer prices of 20% over 2019-2024 but was in line with the average increase in household incomes of 24% over the same period. If we exclude Portugal and Switzerland, the increase in house prices was either in line with the rise in household incomes--as was the case in the U.K.--or below it. As a result, housing affordability in countries such as France, Germany, Italy, and Sweden has increased, with the ratio of house prices to incomes about 5% lower than it was before the COVID-19 pandemic (see chart 3). This should support further price increases because we expect that the labor markets in these countries will remain resilient (see chart 4) and that central banks will continue to cut interest rates.
Chart 3
Chart 4
In Portugal, buy-to-let investors, second-home buyers from Europe, and buyers outside of Portugal increased housing demand further. Non-European buyers--attracted by the Golden Visa, an investment-based temporary residence permit--exacerbated the supply-demand gap in Portugal, resulting in a sharp rise in the house price-to-income ratio. The Portuguese government has since excluded real estate investments from the Golden Visa program and is now considering tightening the regulation of the real estate market to ensure affordability for the local population. In Switzerland, house prices have been more buoyant than elsewhere in Europe. This is because of the comparatively low rise in mortgage rates by 130 basis points (bps) over 2020-2023, compared with over 300 bps in the U.K. and the eurozone, and just below 300 bps in Sweden.
Easing monetary policy should alleviate borrowing costs in 2025. Long-term government yields in Europe rose by an average of 40 bps between December 2024 and January 2025, mainly due to the repricing of U.S. bonds following positive macroeconomic developments. The Swiss bond market, shielded by its safe-haven status, was an outlier, with yields only increasing by 15 bps. Upward pressures on longer-term benchmark yields, which are among the top 5 risks to credit conditions we identified for Europe, could impair mortgage rates, which have moderated from their peak in late 2023 (see chart 5). This is because mortgage rates have tracked 10-year government bond yields more closely than short-term policy rates since 2022 (see charts 6 and 7). We note, however, that the historical correlation between mortgage rates and policy rates is strong because banks that offer mortgage loans traditionally refinance at central bank rates.
Chart 5
Chart 6
Chart 7
We expect further monetary easing. In our base case, we expect the European Central Bank and the Swedish Riksbank will cut rates by another 50 bps this year, while the Swiss National Bank and the Bank of England will reduce rates by 25 bps and 100 bps, respectively. In light of this, the risk of higher mortgage rates in 2025 seems limited. Instead, borrowing costs could ease further, which could improve housing affordability and prolong the recovery in house prices.
Related Research
- G7 Bond Market Developments With A Spotlight On Gilts, Jan. 16, 2025
- Credit Conditions Europe Q1 2025: Fusion Or Fission?, Dec. 3, 2024
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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