The eurozone real estate market is still searching for the bottom.

High interest rates, economic uncertainty, rising repair costs, and questions about future energy efficiency requirements continue to put pressure on housing prices. In our opinion, the bottom will only be reached by the end of the year, and the recovery of the eurozone housing market will take some time..

Reduced demand is making recovery more difficult.Mortgage interest rates have risen sharply over the past year, slowing demand for mortgages. House prices in the region have also fallen as sellers have adjusted their prices. New mortgage production in the eurozone in the first five months of this year was more than 60 percent below year-ago levels, and the number of housing transactions has also fallen significantly. In the first quarter of 2023, for example, they fell 23% in Belgium and the Netherlands compared with the previous quarter, 16% in France and 8% in Spain. With mortgage production being the main driver for real estate transactions, the number of transactions is expected to decline further. Looking forward, it seems unlikely that we will see a timid recovery in the near future.

Eurostat data released last week showed that lower demand led to a 0.9% quarter-on-quarter decline in eurozone real estate prices, following a 1.7% quarter-on-quarter decline in the fourth quarter of 2022.Looking ahead, it seems unlikely that we will see a timid recovery anytime soon. We expect demand to pick up slightly only towards the end of the year, with prices to follow in the first half of 2024. In addition to the negative impact of rising financing costs on prices, the green transition in the housing market will play an increasingly important role in setting prices.

Higher interest rates mean a later bottom.About a year ago, the European Central Bank (ECB) began the most aggressive cycle of interest rate hikes since the beginning of monetary union. Mortgage interest rates have also risen significantly, financing costs have risen substantially, and demand for mortgages has fallen sharply. While the economic outlook has recently weakened and there are growing signs that monetary policy is starting to take hold, at this point in time the ECB is more afraid of stopping too soon than too late. We expect the central bank to raise interest rates by 25 basis points at its July and September meetings. As a result, capital market rates will rise slightly and only begin to stabilize or decline by the end of the year. Demand for mortgages will be subdued for a long time and may also follow a similar scenario.

Rising interest rates are reducing affordability to historically low levels.High interest rates on loans are significantly affecting the affordability of residential real estate, placing a heavier financial burden on future homeowners. Soaring energy prices last year exacerbated the situation, leaving families with less money to make mortgage payments after paying utility bills. As a result, many people have decided to postpone their plans to buy a home, leading to a marked decrease in loan demand and pressure on home prices.

The green transition as a structural key driver.In the long term, the role of energy efficiency in the housing market will grow. Regulatory mechanisms, public investment, and changing consumer preferences are all pulling towards this. Rising energy prices in 2022 and remaining uncertainty about future energy prices have made homebuyers increasingly aware of the benefits of more energy efficient homes. European and national initiatives to reduce CO2 emissions from buildings will also impact the market. This seems to have recently increased the price premium for energy efficient homes over those that use more energy. Demand for energy efficiency is growing, but labor shortages and rising material prices are barriers to meeting the additional demand for energy efficient housing. Given the structural nature of the labor shortage, this slows the housing stock renovation needed to meet climate goals. Overall, we expect euro area house prices to fall by an average of 3.5% to 5% this year. House prices are likely to develop differently across the euro area, with substantial house price declines expected in Germany and the Netherlands, while in Belgium house prices are expected to fall only slightly. However, differences in price dynamics will not only be observed between countries, but also between segments, with energy efficiency playing an increasingly decisive role in price formation.