Why is real estate falling as fast as it has in some European countries?

This situation is certainly not unique to Europe, but most countries are currently experiencing instability in real estate prices, which have long been on an upward trend. While it’s true that the Covid-19 pandemic had limited repercussions on property prices, there was a frenzy of house purchases in the vicinity of major urban centers and by the sea as soon as containment came to an end. So what are the causes of falling property prices in Europe?

Prices fall after some twenty years of continuous rise

Just a few years ago, restrictive regulations led to a rise in property prices (inflation) in the major metropolises, resulting in people moving to the coasts. In the wake of the subprime crisis, some countries, such as Spain, saw prices fall sharply, but only temporarily.

On the other hand, the Covid-19 pandemic has been implicated in a major property appreciation movement that has put many European households out of reach for larger homes in coastal areas or large metropolises. For example, according to The Economist price inflation between 2019 and 2022 is estimated at 40% in the Netherlands, 38% in New Zealand, 32% in Sweden, 28% in Germany and 17% in France. Unfortunately, this increase is not in line with people’s purchasing power.

Interest rates on the rise

In the real estate market, the slightest change in interest rates is noticeable. Low interest rates are helping to drive up house prices across the board, by facilitating credit and a relative improvement in property yields. As a result, low bond yields have motivated investors to invest in equities and real estate.

As a result, mortgage rates in New Zealand broke the 7% barrier for the first time in eight years.

Relatively high prices: the case of France

In France, the real estate market has eased somewhat, but the trend is still upward. We have gone from an increase of around +8.2% in April to +7.1% in September. The overall 1-year increase was +9.2% for housing in general. The number of annual transactions since September 2021 has fallen, but remains above the million mark.

The increasingly tough conditions on the market for granting loans are likely to become apparent in the near future, as loan production is currently on the rise, but is set to fall by almost 33%, according to the Observatoire Crédit logement. According to other predictions, the year 2023, currently underway, will be marked by a drop in transactions to below 1 million. In fact, it is estimated that house prices in 2023 will fall by 10-20% compared with the increases recorded in 2022.

Real estate crisis in certain countries: real risk or controversy?

Around 2 million households in the UK, or a quarter of those with a mortgage, will be burdened with higher interest payments that could represent around 10% of their household income by 2025. The trend is not very different in the Netherlands, where homeowners are paying more than a quarter of their income towards a mortgage, which will rise from 12% to 26% as interest rates rise. If some homeowners have low financial savings, then they are the most exposed to this inflation. This increase in costs reduces the purchasing power of households, who will be forced to sell their homes, a situation that accelerates the fall in prices.

In conclusion, the real estate market has seen a rise in prices (inflation) that is out of step with the income levels of European populations. This situation, combined with interest rate constraints, is currently reversing the trend, with falling property prices observed in several countries.

Picture of Alexandre Feydri

Alexandre Feydri

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