Real Estate for a changing world

At a Glance - European residential markets - H1 2023


Significant rise in mortgage rates

  • The Governing Council decided to pause interest rates hikes in October. Consequently, interest rates are stable for the main refinancing operations (4.5%), marginal lending facility (4.75%) and the deposit facility (4.0%).
  • The average mortgage rate in Europe has risen from 1.31% at the end of 2021 to 3.9% in Q3 2023: +258bps in 7 quarters. The largest increases are observed in the United Kingdom (+415 bps), Estonia (+377bps), Lithuania (+374 bps), Portugal (+366 bps), Poland (+359 bps), Finland (+358 bps), Latvia (+353 bps) and Denmark (+340 bps).
  • The decision to keep interest rates stable reduced pressure on the Euribor 12 months that closed in October at 4.05% after 4.23% in September. However, we expect mortgage rates to carry on increasing to reach the 4.0% threshold by the end of the year.


Transactions are falling

  • Housing transaction volume dropped by 19.0% in H1 2023 on a rolling year basis.
  • The slowdown is driven by several factors: the tightening in credit conditions, the significant increase in mortgage rates and of course the constant increase in house prices over the last 8 years. Therefore, we observe a significant worsening of housing affordability triggering a decline in the number of transactions. Likewise, a wait-and-see attitude now exists, tied to the change in house price cycle.
  • Housing transactions declined by 31% in the United Kingdom, 22% in Portugal and Estonia, 21% in Belgium and 20% in Estonia.


Drop in investment volume

  • Residential investment volumes in Europe reached €19.2bn in the first 9 months of 2023, down -54% compared to the same period last year and -45% vs the 5-year average. The residential investment in Europe is strongly impacted by interest rate hikes. Investors continue in a wait-and-see attitude despite a real interest in the asset class. 
  • The increases in mortgage rates and government bond yields are challenging to the investment market as they reduce the risk premium and the risk adjusted return of real estate. Hence, we expect yields to decompress and thus prices to adjust to balance the increase in the financing cost.
  • Nevertheless, the underlying residential fundamentals are still very positive. We observe a strong disequilibrium between demand and supply in large urban cities. In these locations there is positive population and income growth and upwards pressure in the rental market, magnified by inflation and the shift in the monetary policy. 
At a Glance - European residential markets - H1 2023
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