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Economic Research: Pandemic Won’t Derail European Housing Price Rises

Three months of lockdowns to contain the COVID-19 pandemic and a sharp economic contraction in the second quarter of 15% in the eurozone and 22% in the U.K. year on year have failed to derail housing prices in Europe. Accumulated pent-up demand for homes, the need for home space, resilient household creditworthiness, and low financing costs all contributed to a fast recovery of transactions and a dynamic property market in the latter part of the year. In this context, we expect price increases to soften only a little this year, while we foresee a more pronounced slowdown next year. The return to pre-pandemic levels of activity in 2022, and potential structural changes in housing demand post-COVID-19, should lead to a renewed acceleration in housing demand and prices.

Chart 1


Table 1

Nominal House Prices Change
(% year on year) 2017 2018 2019 2020f 2021f 2022f 2023f
Belgium 3.6 2.5 4.8 1.8 (0.3) 2.7 2.2
France 3.3 3.2 3.9 1.5 1.0 1.5 2.0
Germany 6.1 6.1 6.4 4.6 2.0 4.4 4.1
Ireland 11.9 7.2 1.0 (1.6) (1.1) 4.6 4.2
Italy (1.2) (0.5) 0.2 0.5 (0.5) 0.5 1.0
Netherlands 8.6 9.1 6.5 6.1 (1.5) 4.1 3.8
Portugal 10.7 9.5 9.0 (0.6) 1.2 5.0 4.5
Spain 7.2 6.7 3.7 (1.4) 1.8 4.5 3.6
Sweden 7.5 (1.7) 3.9 3.0 1.8 3.4 3.2
Switzerland 4.0 3.4 2.4 2.0 1.5 2.0 2.0
U.K. 4.6 2.4 1.6 1.6 (1.9) 3.7 4.1
f--Forecast. House price inflation is reported as the year-on-year percentage change in Q4 in each reference year.

Prices Still Climbing, Despite It All

The continued climb in house prices, despite the unprecedented drop in economic activity, is partly linked to the nature of the crisis and the government support put in place to preserve jobs and businesses. To start with, the housing market was largely unable to operate during lockdowns, leading to pent-up demand as soon as it reopened. Meanwhile, household incomes have been largely preserved thanks to short-time work, furlough schemes, and government credit guarantees for firms that have contained the rise in bankruptcies. In fact, households have never saved so much as during the lockdowns. On average, they put 25% of their income aside in the eurozone and 28% in the U.K. in the second quarter of this year (see chart 2). As a result, would-be property buyers are now able to put down bigger deposits on their house purchase.

Chart 2


Financing costs at close to all-time lows are also underpinning housing prices. The European Central Bank's looser monetary policy measures have ensured that households can access cheap financing during the crisis (see chart 3). And even though banks have tightened credit standards since the onset of the crisis, most households in the eurozone are less indebted than during the financial crisis (see chart 4). Favorable financing, combined with government job support measures and high savings, suggest that home buyers' creditworthiness is much better than following the financial crisis. As a result, new housing loans, unlike new consumer loans, increased during the lockdowns by 30 billion in the eurozone between March and May.

Chart 3


Chart 4


The lockdowns have also squeezed housing supply because construction activity dropped by 32% year on year in the eurozone in Q2 and by 36% in the U.K. Construction in Germany was an exception in Europe: activity remained stable over Q2 because it was allowed to operate almost normally, even if it remains far below the levels needed to meet demand. In Europe as a whole, even if transactions haven't yet recovered from the three-month shutdown in March to May, the slowdown in construction means the the supply-demand mismatch will have increased in the long term.

Households Seek More Space

We are nonetheless observing some diverging trends in the housing market. Demand for larger properties has risen much more than for smaller homes (see chart 5). Spending more time at home and having to work at home, households have reassessed their need for space. For those who can afford it, this means they have brought forward their decisions to upgrade.

Chart 5


We are not, so far, seeing a clear shift in favor of rural areas away from big cities. On the contrary, price increases in cities such as Paris, Milan, London, Munich, Frankfurt, and Lyon rose 5% or more on an annual basis in August. Even if, in the current health context, living in a bigger house in the countryside may seem more attractive, property-buying is a long-term investment--considerations such as the job market, schools, public infrastructure, and leisure offerings still play a role. In cities, such as London, the temporary cut in housing stamp duty has also helped boost demand for housing.

More broadly, with long-term interest rates for safe assets now lower than ever--a result of large asset purchases by central banks--investors are also searching for yields in the housing market, where rentals can offer positive returns. European real estate funds reported €11 billion net inflows from March to May, while fixed-income funds reported €88 billion net outflows. This adds to demand pressures on prices, especially in bigger cities.

That said, housing markets in Portugal and Spain have been more negatively affected by the current situation and, along with Ireland, are the only countries where we foresee a drop in house prices this year. Reflecting the structure of the economies, the property sectors in Portugal and Spain are also more oriented toward the tourism industry than elsewhere. The very low tourist turnout this year and high uncertainty about the health situation going forward has adversely affected housing demand and prices. In Ireland, house prices had been softening already ahead of the crisis, which now adds to the downward pressure.

Damaged Labor Markets Could Soften Prices Next Year

Looking towards 2021, we expect housing demand to soften and with it house-price increases. The presently supportive factors, such as high savings and low financing costs, suggest large price corrections are unlikely. But labor market developments are set to become less supportive of household income. We expect governments to phase out job and business support schemes when the health situation normalizes, which we pencil in for mid-2021. This is likely to lead to higher job insecurity in the medium term and cap wage increases. It could also make access to mortgage credit from banks more difficult, as banks weigh the risks they add to their balance sheet. And by then, a large part of the pent-up demand accumulated during lockdown is likely to have been absorbed.

Thereafter, the return to pre-pandemic levels of economic activity and the normalization of the health situation should help a sustainable recovery in jobs and business, lifting home-buying prospects and housing prices with it.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

This report does not constitute a rating action.

Senior Economist:Marion Amiot, London 44(0)2071760128;
Boris S Glass, London (44) 20-7176-8420;
Economist:Sarah Limbach, Paris + 33 14 420 6708;
EMEA Chief Economist:Sylvain Broyer, Frankfurt (49) 69-33-999-156;

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