House prices in the European Union (EU) have taken a surprising turn, recording their first annual fall in nearly a decade. This downturn comes despite a slight recovery in the second quarter of 2023 when house prices rose by 0.3 percent, seemingly defying the odds against the backdrop of rising interest rates, high inflation, and weakening economic growth. However, the preceding two quarters witnessed a decline in house prices, attributed to soaring mortgage rates and the increasing cost of living, which have dissuaded many Europeans from entering the property market.
The consequences of these trends have been significant. The EU has seen a 1.1 percent drop in house prices compared to the previous year, while the eurozone experienced an even more pronounced decline of 1.7 percent. This marks the first annual decrease in house prices in the region since 2014, signaling a shift from the prolonged period of growth witnessed over the past decade.
One of the primary drivers of this change has been the European Central Bank’s (ECB) unprecedented policy rate increases, totaling 4.5 percentage points since the previous year. In response, banks have raised mortgage rates and tightened lending criteria, effectively putting an end to nearly a decade of rising house prices across Europe. These increases were in part a reaction to the long-standing negative interest rates and bond purchases by the ECB, which had driven mortgage rates close to zero in many countries.
The consequences of declining house prices are manifold. A sharp increase in the cost of building materials and labor has hit the construction sector hard in some countries, most notably Germany, where canceled projects and developer insolvencies have become prevalent. This downturn in the construction industry has ripple effects on employment, economic growth, and the overall housing market.
Germany, known for its robust economy and stable housing market, witnessed one of the most significant annual falls in house prices, with a staggering 9.9 percent decrease over the past year. Denmark and Sweden followed suit with declines of 7.6 percent and 6.8 percent, respectively. These declines in some of the EU’s most prosperous nations underscore the broad-based nature of the market correction.
On the flip side, certain countries have continued to experience substantial house price growth despite the broader trend. Croatia saw the most significant increase, with house prices surging by 13.7 percent, followed by Bulgaria with a growth rate of 10.7 percent and Lithuania at 9.4 percent. These disparities highlight the varying economic dynamics and housing market conditions across the EU.
Luis de Guindos, the Vice-President of the ECB, acknowledged that the correction was not entirely unexpected. He pointed out that the significant fall in German house prices, approaching 10 percent in the past year, was indicative of pockets of overvaluation in the market that needed correction. Moreover, he emphasized that while commercial property remained the ECB’s primary concern regarding financial stability, attention must also be paid to the residential property market, which, despite its resilience, could still be impacted by ongoing market shifts.
In conclusion, the European housing market is undergoing a notable transformation, with house prices in the EU falling for the first time since 2014. This downturn is attributed to various factors, including rising interest rates and tightening lending criteria by banks, in response to policy rate increases by the ECB. While some countries have witnessed substantial declines in house prices, others continue to experience growth, highlighting the heterogeneity of the European housing market. The challenges posed by this market correction extend beyond real estate, affecting construction, employment, and overall economic growth. Policymakers and market participants will need to navigate this evolving landscape carefully to ensure a stable and resilient housing market in the future.
Feature photo by Kawser Hamid.
