Eurozone is still searching for a bottom in the housing market.

Stay up to date with the latest economic and financial analytical data from ING. Subscribe to Think.

The decrease in demand complicates recovery.

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.

Mortgage interest rates have sharply increased over the past year, leading to a slowdown in demand for housing loans. Housing prices in the region have also decreased as sellers adjusted their prices. New housing loan production in the Eurozone for the first five months of this year was more than 60% lower than last year's volume, and the number of housing transactions has also significantly declined. For example, in the first quarter of 2023, they fell by 23% in Belgium and the Netherlands compared to the previous quarter, by 16% in France, and by 8% in Spain. Given that mortgage production is a key factor influencing housing transactions, further reductions in the number of deals are expected. A strong recovery does not seem to be on the horizon.

Higher rates mean a later lower bound.

About a year ago, the European Central Bank (ECB) began the most aggressive cycle of interest rate hikes since the establishment of the monetary union. Mortgage interest rates have also risen significantly, financing costs have increased substantially, and demand for housing loans has sharply declined. While economic prospects have weakened recently and there are increasing signs that the transmission of monetary policy is working, the current fear of stopping too early prevails within the ECB over the fear of doing so too late. We expect the Central Bank to raise interest rates by 25 basis points at the meetings in July and September. As a result, capital market yields will increase slightly and will only begin to stabilize or decline by the end of the year.

The green transition as a structural key factor

In the future, energy efficiency will play an increasingly important role in the housing market. This is driven by both regulatory factors and government investments, as well as changing consumer preferences. The rise in energy prices in 2022 and the ongoing uncertainty regarding future energy prices have led real estate buyers to think more about the benefits of more energy-efficient homes. European and national initiatives aimed at reducing CO2 emissions from buildings will also impact the market. It seems that this has recently increased the price premium for energy-efficient housing compared to that which consumes more energy. Demand for energy efficiency is growing, but a shortage of labor and rising material costs are bottlenecks in meeting the additional demand for energy-efficient housing. Given the structural nature of the labor shortage, this is slowing down the renovation of the housing stock necessary to achieve climate goals.

Housing market forecasts

Overall, we expect that, on average, housing prices in the Eurozone will decrease by 3.5% to 5% this year. Housing prices are likely to develop differently across various Eurozone countries, with a significant decline in prices expected in Germany and the Netherlands, while in Belgium, prices are anticipated to change only slightly. However, differences in price development will be observed not only between countries but also between segments, with energy efficiency playing an increasingly decisive role in price setting. The price of energy-efficient new housing is likely to be higher, while older properties with poor energy efficiency are expected to see even greater discounts than what is already being observed in the new housing market.