The housing price ‘bubble’ begins to deflate

Something is going to change in him. The housing price boom that the eurozone is experiencing will begin to deflate next year. They will continue to rise, yes, but more moderately. In Spain, prices will climb 4.6% in 2022, but will slow down to 4% in 2023, 3.5% in 2024 and 3.2% in 2025, according to estimates by S&P Global Ratings.

This cooling is explained by the lower affordability of housing, motivated by the rise in interest rates and the increase in prices at a rate greater than the income of families. The report explains that house prices accelerated “sharply” in the second half of 2021, especially in and on the outskirts of cities due to the demand for more spacious homes. By contrast, prices rose more moderately in Madrid.

“Covid-19 affected home purchases by foreigners, some of whom could return this year, thus limiting the slowdown in price growth,” the text says.

The behavior of the Spanish market is in line with other eleven European countries analyzed by the agency. House prices will go from an average growth of 10% registered in 2021 to 5% forecast for this year and 3% in 2023. The S&P Global Ratings team of economists estimates that the evolution of the market will be “smooth”, since As household economies remain strong, housing supply will be limited and there will be a significant influx of refugees from the Russian-Ukrainian war.

demand cooling

On the demand side, the report finds that it currently remains “high” due to various factors, such as record levels of employment, rising wages, forced savings accumulated during the coronavirus pandemic or monetary policies. accommodating Regarding the last aspect, he believes that its normalization is likely to “cool down” the demand for , although he makes it clear that “it will not stop abruptly”.

Another factor that will influence the future of the real estate market will be inflation, which in the eurozone has run amok to 8.6% in June, which is its all-time high. “Elevated inflationary pressures may also dampen housing demand to some extent by reducing consumers’ purchasing power,” the report says.

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In fact, consumer sentiment has already deteriorated due to price pressure, and households are already seeing a deterioration in their ability to save. Although this may less affect high-income households, which tend to be more active in the housing market than households with lower purchasing power, it is likely to act as a drag on housing demand, especially in 2023, as wages take time to catch up with inflation.

The current economic situation will also have an impact on the market for . Experts suggest that homeowners may find it more difficult to raise rents, which will affect their profitability. The impact will be greater in countries such as Switzerland or Germany where the return on rental housing has been a major boost for investment.

“The demand for housing by investors could be reduced, especially since long-term yields now offer greater profitability,” says the report, which also analyzes the behavior of construction costs in the main European markets. Spain has the highest costs, almost four points above inflation. Other countries such as Belgium, Germany or Sweden also register high figures above the eurozone average.

The S&P analysis also includes the impact that the arrival of millions of people displaced by the war between Russia and Ukraine may have on housing demand. As of June, an estimated 5.5 million Ukrainians left their country, according to data from the United Nations High Commissioner for Refugees (UNHCR) cited by S&P Global Ratings. Although the majority flee to nearby countries, significant figures are also being counted in other countries. There are about 860,000 Ukrainians in Germany, 140,000 in Italy and about 120,000 in Spain. The rating agency points out that the longer the conflict lasts, the more refugees will arrive in other European cities “adding demand to housing.”

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Market trends

Although house prices will slow down in all the European countries analysed, it should be remembered that each market has its peculiarities, which will influence the rate of change. In the case of Germany, experts estimate a price increase of 8% this year and 4.5% in 2025. There, the regulations on energy efficiency will have a special impact, which will make the construction or renovation of real estate more expensive. In addition, the gap between the big cities and the rest of the country is likely to narrow.

In France, the price increase will be 4.5% in 2022 and 3% in 2025. Housing has become much more expensive outside of Paris due to the rise of teleworking and new user preferences, than after the pandemic they look for houses with more light and larger spaces. As for Italy, housing will rise 2.2% at the end of this year and 1.5% three years later. The strong recovery of the Italian labor market is propping up real estate demand, although the report also stresses that demographic conditions will continue to be a “ballast” for long-term housing demand.

In Portugal, real estate will rise 8.5% this year, and 4% in 2025. Housing became 11.6% more expensive last year because the supply was insufficient to absorb demand, despite the increased construction activity. The experts focus on Lisbon and the most touristic cities. It is there where the most notable price increases are taking place. The purchase demand is led by investors who want to acquire a house to later put it on the rental market and by foreign investors.

The analysis of S&P Global Ratings indicates that the slowdown in prices will be especially pronounced in the United Kingdom and Sweden. In fact, in both countries, decreases of 1.3% and 0.8%, respectively, are expected for next year.

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record climb

The latest x-ray prepared by Eurostat confirms the boom that housing prices are experiencing in the euro zone. They rose 9.8% year-on-year in the first quarter of the year, which represents the highest annual increase in house prices since the statistical office began collecting data in 2005. In quarterly terms, houses became more expensive by 1.7%, two tenths less than in the previous three months. All Member States for which data are available showed annual increases, and in seventeen of them the increase exceeded 10%.

The most intense increases occurred in the Czech Republic (24.7%), Estonia (21%) and Hungary (20.6%), while the softest increases took place in Cyprus (1.1%), Finland (4, 3%) and Italy (4.6%). In the case of Spain, the rise in prices was 8.5%, compared to 6.3% in the last quarter of 2021, which represents the highest rate of increase in housing prices since the third quarter of 2007, before the outbreak of the real estate bubble. Despite the significant price rally, our country is still below the European average, as are France (7.1%), Denmark (6.7%) and Belgium (6.4%).

House values ​​also increased in all Member States compared to the previous quarter. Estonia (7.1%), Hungary (6.7%) and Bulgaria (5.2%) led the ranking of increases, while the most modest advances took place in Malta (0.4%), Cyprus (0. 5%) and Germany (0.8%). In Spain, housing rose 2.6% from 1.2% in the fourth quarter of 2021, which represents the largest quarterly increase since the period from April to June 2018.

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