Fresh headwinds are gaining force in Europe’s real estate markets, said Standard & Poor’s Ratings Services in a report published on Wednesday.
Fiscal retrenchment in many countries, especially in the UK, Spain and France, will likely prompt potential buyers to camp on the sidelines. And the specter of interest rate hikes in the coming 18 months, which is what we forecast, will mark the end of central banks’ largely accommodative monetary policies in Europe.
“We expect housing markets to retreat in the UK and France, and remain in the doldrums in Spain and Ireland. In contrast, steady market conditions continue to prevail in Germany,” said Standard & Poor’s chief economist for
Europe, Jean-Michel Six, in a report published on Wednesday “Europe’s Housing Markets To Be Held In Check Between Fiscal Austerity And Tightening Monetary Policy.”
The ECB decision to raise its policy interest rate by 25 basis points (bps) to 1.25% on April 7, 2011, however, is a firmer departure from post-2008 consensus monetary policies. For the first time since June 2008, the Frankfurt-based central bank reckoned that the eurozone’s balance of risks–between lower growth and higher inflation–was tilting toward the latter, justifying higher interest rates.
In our opinion, the ECB’s decision should be put in the broader context of the exceptional measures it has adopted in the past 18 months. The central bank has had to focus on a broader range of targets to restore confidence in the eurozone underpinning sovereign bond prices in the eurozone’s periphery; curbing the price of liquidity available to financial institutions and keeping a grip on retail prices.
The Bank of England’s (BoE) response to steadily rising headline inflation in the UK has so far been much more muted.
“In our opinion, however, a first rate hike seems almost certain in the coming three months. This is because, after the March blip, we think inflation is likely to take off once again, to peak around 5% in the third quarter,” said Six.
The potential shift toward higher short-term interest rates will have various negative effects on European housing markets, including upping reimbursements for current holders of mortgages with variable interest rates, mainly in Spain and Italy and reducing the supply of new housing loans because financial institutions will have to refinance at higher costs.
Recent trends in mortgage approvals signal that the U.K. market is slowly weakening. Beyond the month-to-month seasonal variations, the BoE reports mortgage approvals down about three per cent from a year earlier and amounting to less than half the average monthly rate between 2001 and 2006.
“Overall we anticipate that the UK housing market will drift sideways in the coming 18 months, with prices shedding about five this year and roughly flat in 2012.
“We see signals that the French residential real estate market is slowing, after bouncing back spectacularly in 2010 following two years of contraction. We anticipate a prolonged slump in Spain’s housing markets. Prices may not post massive drops in the coming 12 to 18 months as sales pick up slowly. But we think more time will elapse before supply and demand balance out again,” Six added.
Irish house prices have, in our opinion, completed their correction but it will take time, probably another couple of years–before we see tangible signs of market activity resuming.
“We think prospective homebuyers may well hold off on acquisitions for a while, given governments’ implementation of fiscal austerity plans–particularly in the U.K., Spain, and France–and central banks’ likely actions to raise borrowing costs in the next 18 months, which would halt accommodative monetary policies in Europe.
“We anticipate that the U.K. and French housing markets will likely fall back in the coming quarters, while the Spanish and Irish markets confront continued sluggishness,” Six said.