The Rating Agency Rules Out a Market Crash, But Warns of Price Corrections Across Most of Europe in 2023 and 2024

Author: Alberto Ortega – Europa Press – Archive

Housing prices are expected to experience a correction across most of Europe during 2023, and in some countries, also in 2024, due to rising interest rates set by central banks. However, a market crash is not anticipated, according to S&P Global Ratings, which identifies Portugal (-4.4%), the United Kingdom (-3.3%), Spain, and the Netherlands (-2.5%) as the countries where the most significant nominal declines are expected.

Looking ahead to next year, the agency expects Spain to be among the European markets, along with Germany, where housing prices will see the most substantial nominal declines. The projected drop for 2024 is limited to 1%, while a slight rebound of 1.5% is forecasted for 2025.

Sylvain Broyer, Chief Economist for Europe, the Middle East, and Africa (EMEA) at S&P Global Ratings, notes that there are “few or no prospects for a strong rebound until 2025.”

S&P’s analysis suggests that both housing prices and investment are likely to be affected by the rapid increase in mortgage rates. However, the agency emphasizes that the market will take time to fully adjust to higher interest rates, with some countries experiencing a longer adjustment period than others.

So far, the agency highlights that housing prices have barely adjusted to higher interest rates, likely reflecting supply constraints rather than reduced demand. Prices continued to rise at a sustained rate of about 10% annually during the first half of 2022 in the 12 European countries analyzed.

“We have observed that the adjustment to higher interest rates may take up to ten quarters and is usually twice as pronounced compared to periods of low rates,” explains Broyer. Historically, housing prices in Europe have proven to be quite inelastic to declines.

In this regard, the agency has updated its expectations on interest rate developments, now forecasting that the European Central Bank (ECB) will raise the deposit rate to 3%, up from the 2.25% forecasted last November. It sees it as unlikely that rates will be cut before the end of 2024, which will result in higher mortgage rates in some countries.

Despite rapidly rising nominal mortgage rates, reaching their highest level in about a decade, real rates, adjusted for inflation, remain negative and are expected to stay so until mid-2024.

S&P also notes that the impact of rising interest rates on housing prices and investment may vary from country to country, reflecting differences in European housing markets. Countries with a higher share of variable-rate mortgages, such as Sweden and Portugal, are more exposed to a rapid price adjustment.

Factors Supporting Demand

Aside from the impact of interest rate changes, S&P points out that there are factors that could sustain housing demand in Europe, including better household financial positions supported by record employment levels, wage increases, and leftover savings from government support during the pandemic.

The agency highlights that current wage trends suggest that household purchasing power could recover as early as the beginning of 2024.

Additionally, the influx of Ukrainian refugees has already increased housing demand, although it remains unclear whether families’ housing preferences have changed durably due to the pandemic.