The “bubble” of real estate prices begins to deflate

Something’s gonna change in the real estate market. The boom real estate prices in the euro zone will begin to deflate next year. They will continue to rise, yes, but more moderately. In Spain, prices will rise by 4.6% in 2022, but will slow to 4% in 2023, 3.5% in 2024 and 3.2% in 2025as estimated by S&P Global Ratings.

This cooling is explained by the lower financial accessibility of housing, motivated by the rise in interest rates and the rise in prices at a rate higher than the income of families. The report explains that real estate prices have “significantly” accelerated in the second half of 2021, in particular in the coastal regions and on the outskirts of cities due to the demand for more spacious housing. On the contrary, prices increased more moderately in Madrid.

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

The behavior of the Spanish market is in line with the eleven other European countries analyzed by the agency. Housing prices will fall from an average growth of 10% recorded in 2021 to 5% forecast for this year and 3% in 2023. The S&P Global Ratings team of economists believe that market developments will be “soft” as household savings remain strong, housing supply will be limited and there will be a large influx of refugees from the war between the Russia and Ukraine.

cooling demand

On the demand side, the report finds that it currently remains “high” due to various factors, such as record employment levels, rising wages, forced savings accumulated during the coronavirus pandemic or even accommodative monetary policies. Regarding the last aspect, he believes that its normalization risks “cooling down” the demand for dwelling placeeven if he specifies 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 ran wild at 8.6% in June, its highest level ever. “High inflationary pressures may also dampen housing demand to some extent by reducing consumer purchasing power,” the report said.

In reality, consumer sentiment has already deteriorated due to price pressure, and households are already seeing a deterioration in their savings capacity. Although this may less affect higher-income households, which tend to be more active in the housing market than households with lower purchasing power, it should dampen demand for housing, particularly in 2023, as wages take time to catch up. with inflation.

The current economic situation will also have an impact on the rent. Experts suggest landlords may find it harder 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 stimulus for investment.

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

S&P’s 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. In June, about 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 neighboring countries, significant numbers are also recorded in other countries. There are around 860,000 Ukrainians in Germany, 140,000 in Italy and around 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”.

Market trends

Although real estate prices are slowing down in all the European countries analysed, it should be remembered that each market has its particularities, which will influence the pace of development. 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 particular impact, which makes the construction or renovation of buildings more expensive. Moreover, the gap between the major cities and the rest of the country should narrow.

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

In Portugal, property will increase by 8.5% this year and 4% in 2025. Housing became 11.6% more expensive last year as supply was insufficient to absorb demand, despite the increase of construction activity. The experts focus on Lisbon and the most touristic cities. This is where the most notable price increases occur. The demand for purchase is carried by investors who wish to acquire a house to put it later on the rental market and by foreign investors.

S&P Global Ratings analysis indicates that the price slowdown will be particularly pronounced in the United Kingdom and Sweden. Indeed, in both countries, declines of 1.3% and 0.8%, respectively, are expected for next year.

record climb

The latest x-ray prepared by Eurostat confirms the boom in real estate prices in the euro zone. They increased by 9.8% over one year in the first quarter of the year, which represents the largest annual increase in house prices since the statistical office started collecting data in 2005. In quarterly terms, houses became more expensive by 1.7%, two tenths less than during the previous three months. All Member States for which data are available recorded annual increases, and in seventeen of them the increase exceeded 10%.

The most intense increases took place in the Czech Republic (24.7%), Estonia (21%) and Hungary (20.6%), while the smallest increases took place in Cyprus (1.1 %), Finland (4.3%) and Italy (4.6%). %). In the case of Spain, the price increase was 8.5%, compared to 6.3% in the last quarter of 2021, which represents the highest rate of increase in house prices since the third quarter of 2007, before the bursting of the housing bubble. Despite the sharp rise in prices, our country remains below the European average, as does 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%) topped the rankings for increases, while the smallest increases were in Malta (0. 4%), Cyprus (0.5%) and Germany (0.8%) . In Spain, housing increased by 2.6% against 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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