Residential, rising prices across Europe

House prices in Europe proved more resilient than expected in 2023, especially in the UK, Ireland and south-western European countries such as Spain and Portugal. Only Germany and Sweden deviated from the positive trend. This is the finding of the report by S&P Global, in light of the increased resilience of prices in European real estate markets in the second and third quarter of 2023.

Among the reasons, new demand weakened less than expected. "The European labour market," reads the study, "held up better than expected, with the European economy creating 600,000 net jobs in the second and third quarters of 2023, while wage growth continued to accelerate. Several European governments stepped up their financial support for households, with net social benefits increasing and contributing 2 percentage points to the annual increase in gross disposable household income. In some cases, credit institutions also resorted to forbearance measures to cushion interest rate shocks for households, thus avoiding a collapse in demand. As a result, the affordability of housing - especially for current owners who have resumed mortgage payments - and thus the demand for housing, deteriorated less than expected during the period, leading to few forced sales.

Moreover, even though new demand for housing is being held back by tighter financial conditions, new home loans have almost dried up since the European Central Bank started raising rates in mid-2022, falling to EUR 16 billion in the last 12 months. European companies estimate that they still have almost nine months of business secured by the current arrears. "However, the arrears situation is very different from one country to another, with Italian companies - whose activity has been boosted by the housing tax credit since 2021 - having a record 16 months of orders in arrears, compared to less than four months in Germany."

But supply has been the main factor holding down European house prices over the past two quarters. The European Commission's survey suggests that supply constraints remain the main factor limiting construction activity across the EU. While material and equipment shortages have eased over the past six months, labour shortages remain acute and have contributed to rising construction costs in a labour-intensive sector. Moreover, the price of raw materials used in construction, such as cement, bricks or fabricated windows, has not fallen from its peak. As a result, the production costs of residential construction increased until the second quarter of 2023.

"Supply-side factors, in particular the still high cost of building materials, are the main driver for the resilience of house prices, along with labour market strength, construction backlog and government support. The relative importance of supply factors results in an unusual decoupling of new and existing house prices," the analysts explain.