The Eurozone housing market is feeling the pinch as demand for housing loans plunges amid continuing interest rate hikes, with credit conditions set to worsen further, according to new research from Allianz Trade.
The research notes that the ECB is preparing for another 25bps-rate hike, to bring the deposit rate to 3.75%, while the six-month Euro Interbank Offered Rate (Euribor) is approaching the 4%-threshold.
While annual loan growth suggests a modest decline (1.8% y/y in May from 3.0% in April), the month-on-month dynamics of household credit for mortgage purposes paints a more alarming picture (-EUR34bn m/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% q/q in Q1, down from 6.4% in the previous quarter. Allianz Trade expects this to start to show up in the next European Banking Authority data release later this month.
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% (Spain) and -14% (Germany) since March 2022, and the research expects further corrections of between 5-10% until end-2024.
But higher financing costs 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% of purchasing power in France, 10% in the Netherlands, 15% in Spain and Germany, 14% in Belgium and up to 17% 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% in France, -18% in Italy, close to -19% in Belgium, -10% in the Netherlands and about -8% in Germany.
Despite the uncertain outlook for Eurozone housing prices, the research does 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% and +5% in 2023, and +3% and +4% in 2024 for the major economies) will recover only partially in real terms, and the expected home-price correction will fall short from the breakeven figures mentioned above in most countries, the report says.
Moreover, the fact that fixed-rate mortgages became more popular across almost all the 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, Allianz Trade expects home-affordability losses to range between 5% and 12% by 2024.
