Tighter monetary policy and regulation point to slowdown in property market

The eurozone economy reached its pre-Covid crisis level at the end of 2021 and was set to expand further in 2022 on the back of strong investment programmes, the easing of Covid restrictions, a gradual decline in inflation and improving supply chains. However, the economic outlook for the eurozone has changed sharply with the outbreak of the war in Ukraine.

High energy and commodity prices will weigh on both household purchasing power and corporate production costs, keeping inflation elevated for longer. Longer-lasting disruptions, a new round of delays and protracted supply shortages will hinder production, while the high level of uncertainty could lead to investment and purchasing decisions being postponed. This puts the eurozone economy at risk of stagflation, a toxic mix of slow economic growth (“stagnation”) coupled with rising prices (“inflation”). Although the statistical overhang of last year's growth alone should result in a growth rate of some 2% for the eurozone, it cannot be ruled out that the economy will contract in at least one quarter this year.

Uncertainty about the eurozone’s economic outlook has also caused the European Central Bank to retain maximum flexibility and optionality in normalising its monetary policy. Nevertheless, net asset purchases are expected to end in the third quarter and, in our view, a first rate hike before the end of the year is still possible. Consequently, longer-term interest rates have already increased and should move up further.

• House price growth is measured using the house price index from Eurostat. Note that this index makes an adjustment for quality changes over time. To measure income, we use gross disposable income (source: Eurostat). Number of households and expected growth of number of households for Belgium, Germany and the Netherlands are from het Federaal Planbureau, the German Federal Statistical Office and Centraal Bureau voor de Statistiek, respectively. Data on market structure in Belgium and Germany is from Eurostat and from Centraal Bureau voor de Statistiek and Capital Value for The Netherlands.

Tighter monetary policy is accompanied by higher borrowing costs, adding to lower household purchasing power, already constrained by inflation. In addition, housing market regulation is getting tighter, arguing in favour of some cooling of real estate markets. Nevertheless, housing demand should still exceed supply in many regions. We examine developments in the real estate markets in the Netherlands, Belgium and Germany.