Real Estate Facts: Europe faces many risks from the Home re-pricing process

House price growth across Europe has hit a slow patch in the last year due to a rising interest rate environment. While the annual growth rate remains in double digits, it has been decreasing significantly in the last several quarters. The effect of interest rates on house prices is variable across different countries with some showing significant dips in prices, while others predict prices will grow year-on-year. The structure of mortgage lending in each country and household debt ratios make some housing markets more sensitive to interest rate increases.

The most vulnerable countries are Norway, Sweden, and Luxembourg due to their structural sensitivity to affordability shocks and falling house prices. Meanwhile, Denmark, the Netherlands, and Portugal are also at high risk compared to other European countries. Western European countries like Spain, Italy, and Greece, which have only slowly recovered from the sharp house price corrections due to the global financial crisis, are also at high risk. Eastern European countries bear moderate risk due to their low household debt ratio; however, some signs of unsustainable growth have emerged.

Europe faces many risks from the Home re-pricing process

The mortgage market in Europe is quite diverse with most households in Eastern and Southern Europe owning real estate but not having a mortgage. Meanwhile, in Nordic countries like Norway, Sweden, and Denmark, over 75% of homeowners have mortgages, placing them among the most indebted in Europe. Of the home loans in Europe in 2022, only 16% used floating rates, which reduces the immediate effect of interest rate hikes.

The extent to which house prices rise or fall also depends on the relative long-run economic growth rate. Countries like Sweden and Norway have seen a very high disparity between the growth rate of house prices and GDP, while Denmark and Finland are at a relatively sustainable level. The UK and Switzerland were moderately affected by a sharp drop in house prices, but homeowner loans in these countries are low.

House price growth across Europe continues to slow due to a rising interest rate environment. The variable effects of interest rates on house prices are driven by the structure of mortgage lending, household debt ratios, and long-term economic growth. Households in the Nordic countries are among the most indebted in Europe and are susceptible to affordability shocks when interest rates fluctuate, compared to households in Southern and Eastern Europe. The mortgage market in Europe remains diverse with the majority of loans being fixed-rate, which limits the effect of interest rate hikes on house prices.