We can expect a 9% fall in housing prices within two years in Europe.
Although the the real effect of mortgage rates on house prices in Europe. is uneven, Scope Rating, based on research from the European Central Bank (ECB), indicates that we can expect to see higher energy prices. 9% decrease of the average value of houses in Europe within two years.
“Average annualized price growth over the past four quarters remains in the double digits, but the trend is reversingSome countries, mainly in the Nordics, saw QoQ declines in the third quarter and the trend strengthened in the last three months of 2022,” says Mathias Pleissner, deputy head of covered bonds at Scope.
According to research published in the September 2022 ECB Economic Bulletin, a one percentage point increase in mortgage rates causes house prices to fall by around 5% (after two years) and fall by 8 % of housing investment.
She further specifies that “the dynamics of the housing market are very sensitive to mortgage rates”.. And this historic trend is even more pronounced in a low interest rate environment.
Thus, given the outlook, “we can expect a 9% drop in average values in two years, because that’s where we are: mortgage rates are coming out of their historic lows and, according to the ECB, they rose more sharply than ever in the first half of 2022,” he says.
Nevertheless, we face a very unequal market. Looking at different countries, some markets are more vulnerable than others to interest rate increases.
Thus, the map proposed by Scope suggests that Norway, Sweden and Luxembourg have the greatest structural vulnerability to mortgage risks stemming from affordability shocks and falling values. On another side, Denmark, Netherlands and Portugal also present greater structural challenges compared to other European countries. Meanwhile, peripheral eurozone countries (Spain, Italy and Greece) show relatively strong metrics. In Eastern Europe, the real estate sector presents moderate structural risks.
Added to this is another factor: “The majority of homeowners in Eastern and Southern Europe own a home, but without a mortgage. This contrasts with northern European countries such as Norway, the Netherlands, Sweden and Denmark, where more than 75% of homeowners have a mortgage. As a result, households in these countries are also the most indebted in Europe,” says Pleissner.
About the the diversity of housing finance In Europe, the share of floating rate loans has increased in some countries over the past decade. “This is especially true for the Nordic countries, which are still variable rate mortgage markets and where fixed rate loans are a niche product.