War and bricks and mortar: from energy to rates the risks on residential property in Europe

Dubai, after all, is one of the most interesting nodes. For years, the Emirate was perceived as a privileged landing place for expats, entrepreneurs and large fortunes; today, with the conflict that has directly affected the Gulf area, that narrative has cracked. Reuters reported in March the first signs of a weakening of the Dubai real estate market, with declining transaction volumes, some price reductions and a general rethinking of its status as a safe haven.
Also in recent weeks, the Financial Times and Knight Frank reported that the Emirates would be moving towards greater flexibility for expatriates temporarily abroad, so as not to lose their tax status and limit the haemorrhaging of residents. This is an important signal: when a tax-competitive jurisdiction has to defend its wealthy resident base, European real estate markets also return to the radar of international households.

In the UK, the effects can already be seen more clearly. On the one hand, in March 2026 average house prices rose 0.9% on month and 2.2% year-on-year according to Nationwide; on the other hand, the war with Iran has pushed up borrowing costs and cooled expectations. Reuters reports that the conflict is hitting British buyer confidence and that new purchase applications surveyed by the Royal Institution of Chartered Surveyors fell to the lowest since December. In parallel, mortgages have risen rapidly. The result is a two-speed market: prime London continues to attract attention from international capital seeking refuge, but the mainstream market is likely to be held back by rising borrowing costs and worsening affordability, Real Estate Scenarios notes.

"The average price of flats in the UK (-0.5 per cent) ended 2025 down to around £192,826 (€220,608), driven by a major contraction in London (-3.6 per cent), according to UK Land Registry data. The decline was most pronounced in the capital, with a 3.6 per cent drop, and especially in the centre of the City, where a minus 5.9 per cent was recorded. House prices in the boroughs of Kensington and Chelsea fell by 12.4 per cent, while Westminster, Camden and Hammersmith also recorded double-digit declines (-10.8 per cent),' reports Scenari Immobiliari.

In Switzerland, too, the conflict reinforces the role of a safe haven. Reuters reported in mid-March on an increased propensity of wealthy individuals from the Gulf to move assets to the country, precisely because of its reputation for financial and political stability. This does not automatically mean a generalised residential boom, but it does tend to support demand for high-end rentals, temporary residences and trophy purchases in the more international marketplaces, such as Geneva and Zurich. This is exactly the kind of effect that can be described as 'selective and qualitative'.

For Italia, the underlying picture remains constructive, but with an increasing risk on the financed demand side. The data available for 2025 indicate a recovery in residential buying and selling: the Omi reports a growth in the last quarter of 2025, while market elaborations released in March speak of around 765-767 thousand buying and selling in the entire year, up by more than 6% on 2024. In parallel, rents and prices have also grown: if, however, the energy shock were to consolidate, Italy's market would be exposed to a double pressure: on the one hand, more expensive mortgages and weaker real wages; on the other, new increases in building costs, which would make it even more difficult to expand supply in urban areas where demand is stronger.

Spain continues to be one of the continent's most dynamic markets. Tinsa noted an annual increase of 14.4 % in average house prices for February 2026, with islands and metropolitan areas still accelerating strongly. Here, the war in the Middle East could have an ambivalent effect: on the one hand, the Spanish economy appears relatively more protected than other European countries on the energy front; on the other hand, a return of inflation and higher rates would risk exacerbating affordability problems in already overheated cities. In summary, Spain remains strong, but it is precisely the most 'tight' markets that become more vulnerable to a macro-financial shock.

In France, and in Paris in particular, the dynamic remains more orderly. The recovery observed in recent months is mainly based on less punitive credit conditions than in the recent past and a gradual return of buyers. However, here too the crux is the same: if the Middle East continues to push energy and inflation, the improvement in financial conditions could come to a halt sooner than expected. For the Parisian market, as for other mature European markets, it is not so much the war itself that is the direct driver, but its ability to change the trajectory of rates and thus the solvency of domestic demand.

Globally, the repercussions of the war in the Middle East on the residential sector are therefore unevenly distributed. In countries directly affected or perceived to be more exposed, such as the Emirates, signs of weakening transactions, holiday rentals and confidence can be seen. In the refuge markets - Switzerland, parts of the UK, parts of high-end Mediterranean Europe - opportunistic or prudential demand prevails, often oriented towards rentals and flexible solutions. In mass markets, finally, the main effect is through the cost of money channel: not so much flight or relocation, but less accessibility, more waiting and more caution.

"Of all the countries, Germany will be the one where the recovery will be delayed and only moderate," comment Scenari Immobiliari. A conservative estimate for Italia states that in the next three years (2026-2028) about 170,000 new homes will be built. House prices in European cities have increased by a total of 6.2 per cent in 2025 compared to 2024. Spanish cities have been the main protagonists of price growth: the price of new and used houses recorded a monthly variation of plus 0.9% in January compared to December 2025, placing the annual variation at 14.4%, with the islands (+21.6%) and metropolitan areas (+16.6%) standing out as the groups that have recorded the greatest increase over the last year.

The conclusion, therefore, is that the war in the Middle East is not yet single-handedly rewriting the global residential map, but is reactivating forces with which the sector is familiar: energy shocks, revisions in rate expectations, reallocation of capital towards safe haven assets and postponement of more challenging decisions. In Europe, the starting picture remains better than two years ago, thanks to limited supply and still present demand; however, should the conflict continue and keep oil and gas high, 2026 could turn from a year of consolidation into a year of selective braking, especially for markets more dependent on mortgage credit and those where affordability is already under pressure.

After one of the world's strongest growth cycles - with residential prices having increased by more than 60 per cent since 2022 - Dubai's real estate market enters a phase of gradual normalisation in 2026. This is not a structural reversal, but a physiological slowdown, partly accentuated by the new international geopolitical context. For the time being, one stands at the window. Tensions in the Middle East, airport closures in the area, unstable trade routes in the Red Sea and rising energy costs are having the effect of freezing the situation. And it is above all the mid-range that is showing the first signs of subsidence.

The key factor is supply: the large number of new projects brought to market in recent years is creating competitive pressure which, in a more uncertain geopolitical environment, is resulting in a rebalancing of values.

The behaviour of the top segment is different. The prime areas continue to benefit from sustained international potential demand, fuelled by high-spending investors, relocation of capital from unstable areas, fiscal attractiveness and quality of life. But, indeed, everything remains on hold at this stage.

Dubai is a multifaceted city and the crisis is likely to hit selectively unless everything is resolved quickly.
The prime and waterfront areas can be described as resilient, in particular Downtown Dubai, Palm Jumeira and Dubai Marina. Here, values remain robust, supported by potential international demand and limited supply. Volatility is low and the market continues to be relatively liquid.
In contrast, the mid-range was already stabilising, in particular Business Bay, Jumeirah Village Circle and Dubai Hills Estate. However, these areas show a phase of prospective equilibrium: prices are no longer growing at the pace of the past, but do not show generalised declines. The selectivity of buyers is increasing.
In the peripheral and newly offered areas the situation is clearly more critical. These are Dubailand, Dubai South, Arjan and International City. This is where the greatest downward pressure is concentrated. The high availability of new properties and lower international demand make these markets more sensitive to the cycle and the external environment.