Eurozone: House price growth set to weaken in 2019

Germany
The real estate sector in Germany continues to boom, and construction activity has been one of the few growth drivers in 2018. Prices for residential properties have increased by around 5% across the country, with still significant differences across urban and rural areas.

Given the cooling of the economy, price dynamics should slow somewhat in 2019 and over the coming years. At the same time, however, low interest rates and the strong labour market, as well as the general trend of urbanisation, should keep any slowdown limited. Despite price acceleration since 2010, loan-to-value ratios have remained relatively stable, keeping the risk of a bursting textbook bubble low.

France
In France, real estate prices dropped by 5.5% between early 2012 and 2015. Since then, they have caught up by 9% overall, and by 12% in Paris, and have actually grown by 3% in 2017 and 2018. We don't expect the rhythm to slow down as big cities are still supporting the overall trend, and price gains in real terms remained fairly limited over recent years. Low interest rates are supporting the market without driving exceptional numbers of transactions as activity even decreased slightly in 2018. The level of anxiety among buyers following the 'yellow vest' crisis is certainly an explanatory factor of the relatively low level of activity in comparison to the level of interest rates, and this will continue to have an impact throughout 2019.

Italy
The slowdown in the pace of economic growth might have some bearing on developments in the Italian residential housing market. After hovering at levels close to historical highs for most of 2018, consumer confidence started falling in November and reached its lowest level in more than a year in December. In 3Q18 house transactions were still expanding at a healthy 6.7% YoY pace (5.6% YoY in 2Q18). The price-to-rent ratio remains close to its lows, and affordability is keeping the purchase option attractive. Purchases continue to be fuelled by loans for house purchases, which were still growing at a 1.3% YoY clip in October 2018. Overall, the mood of real estate agents remains decently upbeat on activity, but times are not yet ripe for a quick turnaround in market valuations. According to the November 2018 BoI/Tecnoborsa/OMI survey, an increasing share of agents expected prices to stabilise over the next 12 months (81.7% in 3Q18 from 76.6% in 2Q18), while the share of those expecting prices to rise edged down (to 2.0% from 3.9%). The loan to value ratio stood at 74.9% and the ratio of house purchases financed via mortgages at 78.9%, confirming the relevance of credit availability for house purchase developments.

On price developments, the recent evidence is mixed. The BoI survey shows that the average final discount practiced by sellers on the original offer price increased again to 10.8% in 3Q18 (from 9.9% in 2Q18); on a similar note, average selling time was also up, to 8.2 months (from 7.5 months in 2Q18). We expect the ongoing moderate recovery of disposable income, in conjunction with still cheap mortgages, to further support house purchases, but at a softer pace than we previously anticipated. Given the remaining slack in the market, we expect average house prices to edge up only marginally in 2019, and to post a modest acceleration in 2020.

Spain
House price growth accelerated again in the third quarter of 2018, after a gentle slowdown in the beginning of the year. The year-on-year growth rate in 3Q18 was equal to 7.3%, the highest since the eurozone crisis. The recovery in the labour market supports this development. Admittedly, the economy slowed in 2018, but the unemployment rate continues to decline, and employment growth remains strong. As we think the Spanish economy will continue to slow, this should impact house price. We, therefore, think house price growth will slow to 5.5% in 2019.

Netherlands
In 2018 the average house price increased by 9.0%, surpassing the figure in 2017 of 7.6%. Home sales numbered 218,000, well below the number in 2017 (242,000). Since the trough of 2013, the average house price has increased by 34%. On a national level, the house price has fully recovered from the crisis and is currently 5.0% above the 2008 price peak. For 2019 we expect the price increase to flatten to 5.5% and home sales to further decrease to 200,000. Tightening of the housing market is expected to continue until 2020 so upward price pressure remains. The increased interest of private investors in the Dutch housing market is further pushing prices up. Two factors work to lower upward price pressure. First, a deteriorating affordability of homes (driven by continuing price increases) will reduce housing demand. As mortgage rates have passed their lowest points, this will not compensate for the price increase. Second, the catch-up effect of households that postponed moving plans during the crisis and have pushed up housing prices up since 2013, is now marginal. Note, estimates for 2018 are based on monthly data up to and including 3Q18. The Dutch Land Registry has not published 4Q18 data yet.

Belgium
The macro economic situation in 2018 continued to support the real estate market. During the first three quarters of 2018, there were more transactions than in the same period in 2017 (from about 30,400 per quarter in 2017 to 31,500 per quarter). There was also an acceleration in price growth, from 2.7% in 2017 to 3.9% (based on the three first quarters of each year). The affordability of residential real estate has remained stable since 2016. We measure the growth potential as low in the years to come, mainly due to a slowdown in the world economy which has a strong impact on a small open economy such as Belgium. Moreover, the National Bank of Belgium estimates that residential real estate prices are about 5.5% overvalued, which also limits upward potential. We continue to forecast 2% growth in nominal prices. In real terms this implies that the price of residential real estate remains constant.

Portugal
At the start of 2018, house price growth peaked under the impulse of a strong economy and foreign demand. In 1Q18, price growth of existing residential real estate grew by 13.0%. But since then it has declined to 12.6% in 2Q18 and 9.2% in 3Q18. We expect this downward trend to continue, given the signs of lost momentum in the domestic labour market and weaker external demand (see piece on Portugal).

Austria
In Austria, gross fixed capital formation is currently one of the growth pillars for the economy with strength coming from construction investment. While the sharp increase in building permits in 2017 (+6.8%) suggests ongoing growth in housing construction for 2019, the decline in building permits in the first half of 2018 points to somewhat weaker construction activity in 2020. Nevertheless, residential property prices remain elevated, growing by 6.1% YoY in the first half of 2018. 78% of Austrians expect property prices in their neighbourhood to increase further within the next year, according to a representative ING survey. Some 84% of Salzburg's citizens and 83% of those living in Vienna believe that housing will be even more expensive, from an already very high base. With growth momentum expected to cool down somewhat, we expect the same for momentum in housing prices. However, for the time being and within the current economic environment, the prospering real estate market continues to be well supported, keeping prices at elevated levels.

Ireland
The Irish housing market is slowly starting to feel the impact of a prolonged period of investment in supply. Slowly but surely the excess demand in the housing market is starting to come down as the new supply of houses increases. This is also noticeable in price growth, which has come down to below double-digit growth rates. In April 2018, residential property prices rose by 13.3% but had come down to 8.4% growth by October. As supply continues to come through, the Irish housing market is expected to cool further.

Greece
The acceleration in economic recovery that accompanied the exit of Greece from its third ESM programme brought about new employment gains. During 3Q18, employment expanded by 1.7% YoY, fuelling consumer confidence further. Certainly, the delicate position of Greek banks on NPLs is still weighing on house-purchase related mortgage lending but accelerated NPL disposal initiatives from the main systemic banks should, in principle, help improve lending conditions.

Lending for house purchases was still contracting in November 2018, at 2.9% YoY. Another potential positive might lie with the reduction in the ANFIA taxation on real estate assets included in the 2019 budget. Taking into account that external factors tilt risks to GDP growth to the downside, we still see the ongoing modest recovery in Greek housing prices to continue in 2019 at a slightly accelerated pace.