2023-03-28 05:13:00 ET
Summary
- While home prices are starting to weaken across the continent, the policy response differs across economies.
- In the U.K., the Nationwide House Price Index has fallen 6% from its peak.
- In continental Europe, the fall in house prices has just started.
By Fredrik Repton
While home prices are starting to weaken across the continent, the policy response differs across economies.
In October of last year , we wrote about development in the so-called high-beta housing markets. Since then, housing has become more of a focal point for economists and market participants. This is especially true in Europe, where the share of floating-rate mortgages and short-term fixed mortgages is much higher than in the U.S. Although generally released with a long lag, several European countries provide frequent data that give us a picture of the state of the housing market.
Starting with Northern Europe, Sweden has experienced the largest fall from the peak in home prices. According to Maklarstatistik, apartment prices have fallen 12% from the peak in March 2022, although January and February have shown price growth. In Norway, using statistics from Eiendom Norge, prices are down 2.8% from the peak but have also seen strong growth in January and February.
In the U.K., the Nationwide House Price Index has fallen 6% from its peak. Importantly, January and February did not show any recovery. At this point, the RICS House Price Balance, an important leading indicator, is at its lowest level since early 2009.
Finally, in continental Europe, the fall in house prices has just started. The Netherlands has so far seen a 3.1% drop in house prices from the peak. Similar to Scandinavia, January was a strong month. In France, the process of lower prices has yet to begin. Other large countries like Italy, Spain, and Germany are yet to release 2023 numbers.
The differences in house price trends make sense when looking at them through the lens of monetary policy transmission. Economies like those of Scandinavia and the U.K. tend to have a larger share of floating or short-term fixed mortgages. Therefore, changes in the policy rate feed more quickly into house prices. Judged through this lens, the continental European housing market is likely to weaken going forward as the ECB continues its path to restrictive rates.
What we have learned from European housing markets so far, however, is that they affect monetary policy differently. In the U.K., the Bank of England has been very careful about hiking rates as it has been concerned about the impact on consumers. On the other hand, in Sweden, the consumer has shown real weakness; but the Riksbank has surprised market participants with a strong package of higher rates, draining liquidity and accelerating quantitative easing.
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European Housing: Mixed Policy Picture