In this blog, we will try to present you with insight into the current situation and expectations of the housing market and the drivers behind it according to the ECB Financial Stability Review and Economic Bulletin.
In the Financial Stability Review published by ECB, along with ECB’s Economic Bulletin, an interesting insight regarding the European housing market is presented. As we are all aware now, there is a looming macroeconomic uncertainty. The economic outlook for the euro area, as the main part of financial stability, has weakened, while inflation projections have been revised upwards. It is stated that supply chain and cost pressures that have already been built up were just amplified by the war, which resulted in a further increase in commodity prices and substantially weakened consumer confidence. Also, the report emphasizes that consensus expectations for real GDP growth in the euro area in 2022 have been downgraded to 2.7%, while inflation expectations have been revised upwards to 6.8%. Overall, the Euro area economic outlook weakens on the back of global cost pressures and the war in Ukraine.
According to the ECB, the real estate market in the Euro area shows signs of overvaluation and downward price corrections are to be expected. We already witnessed a few rate hikes by ECB and Fed. Restrictive monetary policy might just be the tipping point for the housing market. „Empirical evidence shows that developments on the real estate market are strongly influenced by the level of interest rates“ was published as part of the ECB Economic Bulletin, Issue 6/2022. Their calculation showed that an increase in mortgage interest rates by one p.p. over the course of two years results in a 5% drop in real estate prices. While Fed increased its reference rate by 3 p.p. (up to 3.25 p.p.), ECB raised its reference rate by 1.25 p.p. with two hikes (for now) – with more hikes expected and already priced in. The market has priced in its expectation for ECB to raise the terminal rate to c. 3 p.p. in 2023. If interest rate mortgage followed the way, this would imply a cumulative increase in mortgage rates for 3.5 p.p. (all the way down from -50 bps). This would, from the previously mentioned statement, imply that EU housing market prices could fall by 17.5% over the course of two years after the hikes.
To spice things up slightly, according to the mentioned ECB Bulletin, „rising interest rates affect the real estate market even more strongly in an environment of very low interest rates“, precisely the environment we were in with ECB’S reference rate being in negative territory since 2013 until recent rate hikes.
Eurostat House Price Index [Euro area; YoY]
Source: Eurostat, Bloomberg
Development of local housing market
Average prices of newly sold apartments per m2 (EUR) (2015 – H1 2022)
Regarding the historical data of the region, only growth in volumes and prices can be seen. But looking forward – one might expect a reverse in trend. Looking at the building permits issued in Croatia & Slovenia, we can finally see a slowdown in issued permits. Taking the latest publications into account, issued building permits in July fell both in Croatia and Slovenia for 2.6% and 5% YoY, respectively. Further, according to the Slovenian statistical office in Q2 2022 number of used apartments sold in Ljubljana fell by as much as 25% YoY with price growth slowing its pace a bit. Compared with the quarter before, we can also see a slowdown with 10% fewer deals regarding used apartments. Looking specifically at housing prices in Zagreb average price of newly sold apartments is currently standing at 2,454.3 EUR per m2. If we would apply the mentioned price correction of 17.5% (on the EU level) that could appear over a period of two years, we can infer that the average price in Zagreb in the same period could fall even to EUR 2,024.8 per m2. This is of course a potential outcome and each investor or home buyer has to make sure they take into account all the important assumptions when making a decision. Is it an investment over which one expects a return or is it a home-buying decision? In the case of the latter, one must take into account that a year or two from now, even if prices come down slightly, interest rates on home loans will surely be higher. So, that will cost a home-buyer more monthly if they are taking a loan. It depends if home prices will fall and how much they will fall so that one can calculate all the trade-offs. In order to make a good decision, one has to monitor the housing market and housing loan rate market. The first one is not showing signs of weakening if we are looking at statistics, but this is always a lagging indicator so real-estate brokers are usually the best place to look for answers. Brokers are usually privy to the time of inventory on the market. If it is lengthening that could be a sign that the sellers’ market could be beginning to tilt in the opposite direction. Another sign could be that more sellers have been lowering their prices to attract buyers. On the other hand, we can surely say that at the housing loan rate market in Croatia is beginning to tighten. Bank’s loans asking interest rates have increased since summer by 30 – 80 bps and we are sure that more hikes are to come soon.
