House prices in Europe will rise the most in The Netherlands, Germany and Sweden this year, despite the Covid-19 lockdowns and a sharp drop in economic activity, while Ireland, Spain and Portugal could see small declines, according to global ratings agency S&P.
Residential property prices in The Netherlands are expected to rise 6.1 per cent in 2020, while Germany and Sweden will see increases of 4.6 per cent and 3 per cent respectively, S&P economists said in a report published on Tuesday. Prices are also expected to rise in Belgium, France, Italy, Switzerland and the UK, even as a second wave of coronavirus threatens economies across the continent once again.
"Accumulated pent-up demand for homes, the need for home space, resilient household creditworthiness, and low financing costs have all contributed to a fast recovery of transactions and a dynamic property market in the latter part of the year," said Marion Amiot at S&P.
Despite three months of lockdowns to contain the Covid-19 pandemic and a sharp economic contraction in the second quarter of 15 per cent in the eurozone and 22 per cent in the UK year-on-year, housing prices in Europe have remained resilient, said S&P.
Housing supply was squeezed during the movement restrictions, as construction activity dropped by 32 per cent year-on-year in the eurozone in the second quarter and by 36 per cent in the UK. Construction in Germany was the exception in Europe, where activity remained stable over the second quarter because it was allowed to operate almost normally.
However, spending more time at home and having to work remotely saw many households reassess their need for space, with those that could afford it then choosing to upgrade.
"In this context, we expect price increases to soften only a little this year, while we foresee a more pronounced slowdown next year as government support through the pandemic is phased out and labour market developments become less supportive of household income," said Ms Amiot.
The global economy is set to contract 4.4 per cent this year as a result of the pandemic, according to the International Monetary Fund, with the crisis costing as much as $28 trillion in output losses over the coming five years.
However, employment in the euro area decreased to 66.2 per cent in the second quarter, with the highest decreases of 3 per cent found in Estonia, Ireland and Spain, according to the Organisation for Economic Co-operation.
The continued climb in house prices is partly linked to the nature of the crisis and the government support put in place to preserve jobs and businesses, S&P said.
With the housing market largely unable to operate during lockdowns, it led to pent-up demand as soon as it reopened. Meanwhile, household incomes have been preserved thanks to short-time work, furlough schemes, and government credit guarantees for firms that have contained the rise in bankruptcies.
As a result, households have never saved so much as during the lockdowns, putting aside 25 per cent of their income aside in the eurozone on average and 28 per cent in the UK in the second quarter of this year. This allowed would-be property buyers to put down bigger deposits on their house purchase.
In addition, financing costs are close to all-time lows with the European Central Bank's looser monetary policy measures allowing households to access cheap financing during the crisis. New housing loans, unlike new consumer loans, increased during the lockdowns by $30 billion in the eurozone between March and May.
“Even though banks have tightened credit standards since the onset of the crisis, most households in the eurozone are less indebted than during the financial crisis. Favourable financing, combined with government job support measures and high savings, suggest that home buyers' creditworthiness is much better than following the financial crisis,” S&P said.
Looking ahead, the ratings agency expects housing demand to soften next year and with it house price increases.
“The presently supportive factors, such as high savings and low financing costs, suggest large price corrections are unlikely. But labour market developments are set to become less supportive of household income,” it said.
The return to pre-pandemic levels of activity in 2022, and potential structural changes in housing demand post-Covid-19, should lead to a renewed acceleration in housing demand and prices, S&P said.