Nominal house prices quickly rebounded in 2024 as housing affordability improved, prompting S&P to revise their price forecasts upwards. They now anticipate house prices in the 11 countries covered in their latest financial services report to rise by nearly 3% per year on average between 2025 and 2027.
“We expect the easing of monetary policies to help mitigate the risk of rising mortgage rates, despite recent increases in long-term yields across Europe. The correlation between mortgage interest rates and policy rates remains strong,” the report states.
Improved housing affordability was the key driver behind the quicker-than-expected recovery of European housing markets in 2024, with particularly strong rebounds in Italy, the Netherlands, Ireland and Spain.
Additionally, weaker real estate investment, supply still constrained by labour shortages and recovering demand are expected to keep prices high for at least the next three years.
This surge in demand is being driven by record employment levels across most European economies, a recovery in household income, a reduction in household debt and population growth, especially in urban areas.
“Mortgage interest rates continued to moderate through the fourth quarter of 2024, as stricter building regulations aimed at meeting energy efficiency requirements boost new home construction. We expect these factors to continue influencing demand over the next two years, while supply constraints are likely to ease,” S&P analysts noted.
However, they emphasised that the pace of recovery varies between countries. House prices rebounded more quickly in Italy, Portugal, the Netherlands, Spain and Ireland during 2024, driven by factors unique to each nation.
In Italy, the impact of the Superbonus programme (a tax relief measure introduced during the pandemic to stimulate the construction and renovation sector) is waning, resulting in a normalisation of demand, which has led to a rise in the price of existing homes.
Conversely, due to a decline in the working-age population, labour shortages have eased less significantly than in other countries. Meanwhile, employment levels are at their highest and household debt relative to income has reached its lowest point in a decade.
In Portugal, building permits have returned to 2009 levels. However, the backlog of supply is unable to meet demand, particularly in densely populated areas. The real estate market is also benefiting from strong foreign demand.
Meanwhile, in Spain, the robust labour market has not only boosted household incomes but also improved housing affordability. Additionally, the level of mortgage debt in the Spanish housing market is historically low and variable-rate mortgages are being increasingly replaced by fixed-rate loans.
Meanwhile, in the Netherlands, mortgage interest deductions and tax breaks for first-time homebuyers have likely further boosted already high demand, prompting the Dutch National Bank to recommend reducing these tax incentives.
In contrast, the Irish property market is distinct from the rest of Europe. House prices have only corrected in real terms, driven by a lack of supply, high immigration in recent years and a strong labour market.
More affordable housing will support increased demand
Since 2019, average house prices in Europe have risen by 25%, despite the recent correction in 2022–2023 due to central bank rate hikes. This increase in house prices has outpaced inflation, which rose by 20% between 2019 and 2024, although it closely matched the 24% increase in average household income during the same period.
House price growth was in line with or below household income growth (as seen in the UK), except in Portugal and Switzerland. As a result, housing affordability has improved in countries such as France, Germany, Italy and Sweden, with the ratio of house prices to income around 5% lower than before the pandemic.
“This should support further price increases, as we expect labour markets in these countries to remain resilient and central banks to continue cutting interest rates,” S&P stated in its analysis.
Monetary policy easing should ease borrowing costs in 2025
Long-term government bond yields in Europe rose by an average of 40 basis points between December 2024 and January 2025, primarily due to the appreciation of US bonds following positive macroeconomic developments. The Swiss bond market, sheltered by its safe haven status, was an outlier, with yields rising by only 15 basis points.
“Upward pressure on long-term benchmark yields, which we identify as one of the top five risks to credit conditions in Europe, could impact mortgage rates, which have moderated since their peak in late 2023. This is because mortgage rates have closely followed 10-year government bond yields, rather than short-term policy rates, since 2022. We expect further monetary easing,” they added.
In their baseline scenario, the analysts expect the European Central Bank (ECB) and the Swedish Riksbank to cut rates by another 50 basis points this year, while the Swiss National Bank and the Bank of England are likely to reduce rates by 25 basis points and 100 basis points, respectively. As a result, the risk of higher mortgage rates in 2025 appears limited. Instead, borrowing costs could decline further, potentially improving housing affordability and extending the recovery in house prices.