The Eurozone housing market is feeling the pinch as demand for housing loans plunges and the ECB keeps hiking interest rates, according to a new report from Allianz Trade. Credit conditions keep deteriorating; the ECB is preparing for another 25 bps-rate hike (to bring the deposit rate to 3.75 percent) and the six-month Euro Interbank Offered Rate (Euribor) approaching the 4 percent threshold. While annual loan growth suggests a modest decline (1.8 percent y-o-y in May from 3 percent in April), looking at monthly dynamics of household credit for mortgage purposes points to a more alarming picture (-€34 billion m-o-m).
“Demand for loans has plunged as households cannot bear escalating mortgage costs; gross non-financial investment (which refers mainly to housing) decelerated by 5.5 percent q-o-q in Q1, down from 6.4 percent in the previous quarter. We expect this to start to show up in the next European Banking Authority data release later this month,” says Allianz Trade.
However, despite the shift in market dynamics, the total cost of purchasing a house is still significantly higher than it was before Covid-19. Real house prices in the major Eurozone economies have already contracted between -1.5 percent (Spain) and -14 percent (Germany) since March 2022, and we expect further corrections of between 5-10 percent until end-2024. But higher financing costs (i.e. mortgage payments) more than offset this decrease, resulting in a deep decline in home affordability across the Eurozone.
“At the same time, escalating inflation and lagging wage growth are also eating into purchasing power. Looking at a typical 20-year mortgage, we find that the median household lost 13 percent of purchasing power in France, 10 percent in the Netherlands, 15 percent in Spain and Germany, 14 percent in Belgium and up to 17 percent in Italy. Considering the change in housing prices, in order to restore the supply-demand balance from 2022, residential house prices need to decline by -16 percent in France, -18 percent in Italy, close to -19 percent in Belgium, -10 percent in the Netherlands and about -8 percent in Germany,” explains the report.
“Despite the uncertain outlook for Eurozone housing prices, we do not expect consumers to fully recover purchasing-power losses – and the full transmission from market interest rates to mortgage rates is also still in the making. In 2024, wage-growth expectations (between +4 percent and +5 percent in 2023, and +3 percent and +4 percent in 2024 for the major economies) will recover only partially in real terms, and the expected home-price correction will fall short of the breakeven figures mentioned above in most countries. Moreover, the fact that fixed-rate mortgages became more popular across almost all countries has prevented a full pass-through to mortgage rates. But this will come as many mortgage rates are fixed for only a specific period of time. As such, we expect home-affordability losses to range between 5 percent and 12 percent by 2024,” Allianz Trade concludes.
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