Vienna, Paris, Madrid, London, Stockholm The rapid turnaround in interest rates by the major central banks is causing turmoil on the European real estate markets. Soaring mortgage rates combined with high inflation and falling home prices are threatening homeowners across the continent.
In Sweden, four percent of all owners can no longer service their loans. The head of Sweden’s Financial Supervisory Authority, Daniel Barr, speaks of “unprecedented financial pressure on households”. The problem is also growing in other European countries.
In Germany, the credit agency Creditreform expects that in the medium term more people will have to foreclose on apartments or houses. “The significantly higher interest burden for follow-up loans will particularly affect consumers who have calculated tightly when taking out a loan in a phase of low interest rates. And there are quite a few,” said the head of Creditreform economic research, Patrik-Ludwig Hantzsch, to the Handelsblatt. A rising default rate for real estate loans increases the pressure on house prices and would affect the banking sector – real estate loans are an important business of the institutes.
In the UK, house prices fell in March the most since 2009. According to the real estate seller McMakler, the prices for residential property in Germany fell by 6.2 percent in the first quarter compared to the previous year. The Harvard economist Kenneth Rogoff recently warned in the Handelsblatt that there is a risk of a “steep, sustained decline in prices for residential and commercial real estate”.
A look at new business shows just how much pressure the real estate market is coming under. The number of new private real estate loans in Germany fell by more than 50 percent in February compared to the previous year – more than ever before.
Difficult situation in Sweden: Twelve percent of net income for mortgage interest alone
The upheavals are already particularly severe in Sweden. The vast majority of Swedes have variable mortgage rates and thus feel interest rate increases immediately. In addition, there is a high level of debt of private households of around 200 percent of disposable income.
According to calculations by the financial regulator, new borrowers now pay twelve percent of their net income for interest alone. Treasury Chief Barr warns: “We fear it will get even worse this year.”
Some banks have already granted their borrowers the suspension of payments in exceptional cases. However, the majority of households have to save in other areas in order to compensate for the increased housing costs. This, in turn, should slow down consumption and growth – and thus affect other parts of the Swedish economy.
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The situation in Great Britain is similarly tense. House sales prices fell in March more than at any time during the 2009 financial crisis. They were 3.1 percent below the previous year’s value, the building society Nationwide announced on Friday. Compared to the previous month, the price level fell by 0.8 percent.
Robert Gardner, Nationwide’s chief economist, says: “It will be difficult for the market to regain much momentum in the near term as consumer confidence remains weak and household budgets remain under pressure from high inflation.”
House prices in the UK plummeted in October 2022 after mortgage rates rose to as much as 6%. Susannah Streeter, property market expert at UK financial services firm Hargreaves Lansdown in London, says: “The UK property market is already feeling the effects of rising mortgage rates and if lenders become more cautious it could be another blow.”
The non-partisan Office for Budget Responsibility (OBR) predicts that house prices in the UK will fall by 10% this year.
The UK’s main financial regulator, the Financial Conduct Authority (FCA), warned back in January that more than 750,000 mortgage borrowers would be unable to meet their payment obligations in the next two years. By mid-2022, 200,000 borrowers were already in arrears. Experts therefore fear that homeowners on the island could be forced into distress sales, which would push home prices further down.
Help for low-income families in the UK, Portugal and Poland
The UK government is now trying to increase the supply of certain mortgage loans with government guarantees. It also shortened the waiting time after which low-income families can apply for repayable interest assistance if they cannot make their mortgage payments on time.
Help for vulnerable mortgage holders is the most common measure taken by governments in Europe to alleviate the rising mortgage burden on households. After all, the rise in interest rates can easily add up to several hundred euros per month, depending on the amount of the outstanding burden.
Poland’s government has also intervened in the mortgage market. The key interest rate, which is now 6.75 percent, has made money market mortgages much more expensive – in mid-2022, 52 percent of newly concluded mortgages in the country had a variable interest rate. The government has decreed that debtors may suspend interest payments for four months in both 2022 and 2023.
In Portugal, the government plans to help vulnerable families pay off their mortgages, force homeowners to rent vacant properties and ban new vacation rental licenses such as Airbnb. Because in Portugal, the high real estate prices are a problem for apartment and house buyers due to high demand from abroad and tourism. According to Eurostat, real estate prices have risen by 93 percent compared to 2015 – almost twice as much as the EU average.
The number of households with a variable interest rate for new mortgages was also among the highest in Europe at 75 percent in mid-2022. The rapid turnaround in interest rates by the ECB in recent months has hit them accordingly. “The banks haven’t raised mortgage interest rates yet, but sooner or later they will have to, and then there could be big problems,” fears economist Joao Cesar das Neves from the Catholic University in Lisbon.
At the end of last year, the Spanish government also agreed aid for socially disadvantaged households with the banking associations and the Spanish central bank. Depending on how much their mortgage burden has increased, they can take advantage of a lower interest rate during the five-year grace period, extend the grace period by two years, or extend the mortgage term by up to seven years.
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A real estate bubble burst in Spain in 2008 – prices have been rising again since 2015, but less so than in other EU countries. “You are at a healthy level,” judges Félix Lores, real estate expert at the major bank BBVA. However, the trend is pointing downwards: In January, house prices for apartments fell by 2.2 percent and for houses by 1.2 percent compared to the previous year. Lores expects “at most moderate price reductions of nominally three to four percent” for the year.
State caps on interest rates in France and Hungary
France and Hungary are countering rising mortgage interest rates with an interest rate cap. It has a long tradition in France: there has been a law against so-called usury for years.
Because of the rapid increase in key interest rates, the central bank is now adjusting the government interest rate cap every month instead of every three months as before. The cap applies to all costs associated with a loan, including insurance.
Real estate prices are also falling in France, but the extent is limited. In the past year, prices have risen by a total of 6.7 percent. While the big cities fell by more than one percent, the places by the sea and in the ski areas grew strongly, in some cases by more than ten percent. However, real estate experts assume that they could fall by three to ten percent this year, depending on the region.
Hungary’s Prime Minister Viktor Orban introduced an upper limit for variable mortgage interest rates at the beginning of 2022. The basis was the interest rate level at the end of October 2021. The upper interest rate limit was originally intended to apply for six months, but it has now been extended to the end of June of this year.
However, the instrument is controversial: the heads of the central banks have repeatedly spoken out against the cap. In February, Hungary had the highest rate of inflation in Europe at just under 26 percent. When the government imposes interest rate caps, it hinders the central bank’s anti-inflationary measures.
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