This is according to S&P, and while the rating agency rules out a market collapse, it warns of a price correction in most of Europe in 2023 and 2024.
House prices in Spain 2023-2025
House prices in Spain 2023-2025 Bastian Pudill on Unsplash

Will property prices fall in Spain in 2023? This is likely to be the case, as house prices in Spain and in most of Europe will experience a correction during 2023 and in some countries also in 2024. This in a context of interest rate hikes by central banks, although there will not be a market collapse, according to the agency S&P Global Ratings, which points to Portugal (-4.4%), the United Kingdom (-3.3%), Spain and the Netherlands (-2.5%) as the countries where the most intense house price decreases will be recorded.

Likewise, for next year, the agency expects Spain to be the European market analysed, along with Germany, where house prices will fall the most in nominal terms, although the estimated fall in 2024 will be limited to 1%, while for 2025 it projects a slight upturn of 1.5%.

In this regard, Sylvain Broyer, chief economist for Europe, the Middle East and Africa (EMEA) at S&P Global Ratings has pointed out that there is "little or no prospect of a strong rebound until 2025".

In its analysis, S&P considers it likely that both house prices and investment will be affected by the rapid rise in mortgage rates, although it stresses that it will take time for the market to fully adjust to higher interest rates, with some countries taking longer than others.

So far, the agency stresses that house prices had barely adjusted to higher interest rates, probably reflecting supply constraints rather than declining demand, and continued to rise at a steady pace during the first half of 2022 at an average of 10% per year in the 12 European countries analysed.

"We have found that the adjustment to higher interest rates can last up to ten quarters and is typically twice as pronounced as after a low interest rate regime," Broyer explained, although historically house prices in Europe have been shown to be quite inelastic to downward movement.

In this regard, the agency has updated its expectations for interest rate developments and now expects the European Central Bank (ECB) to raise the deposit rate to 3%, up from 2.25% in last November's forecast, while it sees little likelihood of a rate cut before the end of 2024, which will result in higher mortgage rates in some countries.

However, although in nominal terms mortgage rates have risen rapidly, reaching their highest level in a decade or so, in real, inflation-adjusted terms they remain negative and are likely to remain so until mid-2024.

It also notes that the impact of interest rate rises on house prices and investment may also vary from country to country, reflecting differences in housing markets in Europe, with a more severe and accelerated effect in countries with a higher share of variable rate mortgages, leaving Sweden and Portugal more exposed to rapid price adjustment.

Factors supporting demand 

On the other hand, apart from the impact of interest rate developments, S&P points out that there are factors that can also support housing demand in Europe, including the improved financial position of households supported by record levels of employment, rising wages and the savings remaining from government support during the pandemic.

Thus, the agency notes that current wage trends suggest that household purchasing power could recover as early as the beginning of 2024.

It also warns that the population increase caused by the influx of refugees from Ukraine has already increased the demand for housing, while it is not yet clear whether household housing preferences have changed in a lasting way due to the pandemic.