Transcript Jörn Stobbe nuovo presidente del Rics Europe

Economic Research:
Low Interest Rates Are Only Slowly
Reviving Europe's Housing Markets
Economist:
Sophie Tahiri, Paris 33 1 44 20 67 88; [email protected]
EMEA Chief Economist:
Jean-Michel Six, EMEA Chief Economist, Paris (33) 1-4420-6705;
[email protected]
Table Of Contents
Belgium's Housing Market Is Declining On Mortgage Tax Relief Cuts
French House Prices Are Still Falling Due To Weak Growth And High
Unemployment
Germany's Housing Market Should Regain Momentum This Year
In Ireland, Prices Are Rising Strongly On The Economic Recovery
Italian House Prices Are Still Falling, But At A Slower Rate
In The Netherlands, High Household Debt Is Restraining Market Recovery
Portuguese House Prices Are Slowly Improving, Not Least Due To Foreign
Demand
Spain's Housing Market Is Starting To Heal As The Economy Rebalances
Swiss House Prices Are Cooling On Tighter Lending Rules And Fewer
Foreign Investors
U.K. House Price Growth Is Slowing Due To Deteriorating Affordability
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Economic Research:
Low Interest Rates Are Only Slowly Reviving
Europe's Housing Markets
House prices will continue to fall in some European housing markets this year amid weak economies and tight lending
conditions. We forecast French and Italian home prices will continue to slide this year by 3% and 2%, respectively, on
weak economic growth, high unemployment, and subdued consumer confidence. The Belgian residential market could
fall by 3.5% following a cut in mortgage tax relief this year, while tight regulations on lending along with the renewed
appreciation of the Swiss franc will put the brakes on the Swiss housing market, leading to a 1% drop in prices.
Nevertheless, we believe the European Central Bank's (ECB's) large quantitative easing (QE) program, the resulting
weakening euro, as well as falling oil prices could arrest market declines or spur a further recovery in most markets
next year. Spain's housing market could return to growth in 2016 (2%) from its heavy slump in recent years. Our
baseline forecast is that long-term interest rates will stay historically very low over the next two years as the ECB
implements asset purchases of €60 billion per month from March this year until at least September 2016.
Overview
• Very low interest rates, a weaker euro, and low oil prices could support a recovery in Europe's house prices
over the next 24 months.
• However, we think prices will continue to decline this year in France (-3%) and Italy (-2%) due to weak
economic conditions and high unemployment, and in Belgium (-3.5%) and Switzerland (-1%) on tight mortgage
regulations.
• The ECB's quantitative easing program will likely have only a limited benefit for eurozone housing markets
because interest rates are already at record lows in most countries.
• We forecast Ireland's housing market will experience the highest price rises this year at 9%, followed by
Germany (5%) and the U.K. (4%).
Still, eurozone housing markets will benefit less from QE than similar measures in the U.K. and U.S., in our view. The
U.K. has an undersupply of housing and most mortgages outstanding have a variable interest rate that adjusts
automatically as the base rate changes. So, the drop in the U.K. variable mortgage rate lowered consumers' debt
service payments and possibly drew new buyers into the market or allowed people to trade up. In the eurozone, most
countries have fixed-rate mortgages and interest rates are already at historical lows. In the U.S., the Fed's QE programs
may have accelerated a recovery in the housing market by putting a floor on mortgage interest rates, as it directly
purchased debt of government-sponsored enterprises such as Fannie Mae and Freddie Mac, as well as the
mortgage-backed securities that these enterprises sponsored. Such benchmark bonds don't exist in the eurozone, so
the effect of lowering mortgage interest rates is less direct. Recoveries in some eurozone markets will continue to be
held back by high household leverage, such as in the Netherlands, or constrained domestic demand, as in Portugal.
Ireland should see the strongest price rises among Europe's housing market this year, growing by 9% on the back of an
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improving economy and short supply of housing that has released pent-up demand. We think stronger lending controls
by the Central Bank of Ireland should prevent house prices from spiraling out of control. The German and U.K.
housing markets should also stay on a solid growth path this year, growing by 5% and 4%, respectively. In Germany,
favorable economic, employment, and funding conditions, as well as affordability are underpinning growth. In the U.K.
very low interest rates and a still robust economy are encouraging house purchases, although tighter lending criteria
and a less affordable market are starting to slow the market.
Table 1
European Housing Market Forecasts
Nominal house prices, % change year on year
2012
Belgium
France
Germany
2013
2014e
2015f
2016f
1.5
1.2
(0.5)
(3.5)
(2.5)
(2.0)
(1.9)
(4.0)
(3.0)
0.0
4.6
3.2
3.0
5.0
3.5
Ireland
(6.2)
6.0
16.0
9.0
5.0
Italy
(5.2)
(5.3)
(3.5)
(2.0)
1.0
Netherlands
(7.6)
(4.3)
2.2
1.5
2.5
Portugal
(2.7)
(3.0)
(1.0)
1.0
1.5
(10.4)
(4.6)
(2.0)
0.0
2.0
Switzerland
3.6
4.6
0.5
(1.0)
1.0
U.K.
2.3
5.4
7.0
4.0
3.0
Spain
e--Estimate. f--Forecast. Sources: S&P, OECD, Hypoport.
Belgium's Housing Market Is Declining On Mortgage Tax Relief Cuts
House prices in Belgium could fall by 3.5% this year and 2.5% in 2016 (see table 2) following a cut in mortgage tax
relief on loans signed after Jan. 1, 2015, in the Flanders region, representing more than 60% of Belgian house
purchases. This follows a continuous fall in home sales in 2014. However, low interest rates and high household
savings should limit the decline.
Recent trends
National statistics indicate that house prices declined by 0.8% year on year in the third quarter (Q3) of 2014 after losing
0.9% on the previous quarter, and 0.5% on average over the past four quarters. Prices mainly weakened for newly built
dwellings and previously owned houses, while previously owned flats and villas posted price increases in Q3 2014.
Meanwhile, purchase transactions continued to decrease in 2014 for the second consecutive year. Home sales fell by
6.2% in the country during the first three quarters of 2014 on the same period of 2013. The decline was greater in
Flanders (-7.6%) than in the Brussels region (-3.9%) and Wallonia (-4.0%). However, we think purchasing activity may
have revived in Q4 2014 because we expect that buyers in Flanders will have rushed to sign mortgages before new,
less attractive fiscal rules took effect on Jan. 1, 2015. Indeed, ECB data show a strong acceleration in gross lending,
with housing loans amounting to €6.5 billion in October and €7.1 in November compared with an average of €2 billion
on previous months since 2003.
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In our view, reduced affordability for housing and uncertainty over future fiscal incentives for purchases have reined in
demand overall. Household disposable income barely grew last year. Slow improvements in labor conditions and
continued wage moderation are constraining domestic demand. Furthermore, the affordability (price-to-income) ratio
is well above its long-term average, suggesting that homes were overvalued by 50% in June 2014, making them still
among the least affordable in the eurozone. In Brussels, in particular, prices have doubled since 2004, compared with
an 80% increase in the country as a whole. Meanwhile, debates over the housing taxation regime led to a wait-and-see
approach by households. Above all, the mortgage tax relief or "Bonus Logement," which since Jan 1, 2015, has been
administered at regional rather than federal government level, has increased uncertainties over whether regions would
maintain or reduce a fiscal advantage in light of fiscal consolidation constraints.
Nevertheless, two factors underpinned prices in 2014. First, financing conditions are very supportive, with interest
rates on new mortgages declining to historically low levels of 2.86% in October 2014, down from 3.53% a year earlier,
while the average mortgage term continues to increase. Second, savings are still elevated, enabling Belgians to make
large down payments when buying a home. In the three quarters to September, the loan-to-value (LTV) ratio was 62%,
suggesting that 38% of the value of transactions in the secondary market were paid in cash. This is however, less than
the 40% recorded in 2013.
Future trends
We believe that changes in the housing taxation regime in Flanders are likely to trigger a fall in house prices
throughout Belgium. Following regional elections in May 2014, the new coalition led by the New Flemish Alliance
decided to reduce tax relief on interest payments and capital redemptions for mortgages signed after Jan. 1 this year. It
has reduced the maximum amount qualifying for tax reduction to €2,360 per individual from €3,120, and this sum will
not be adjusted for inflation. Furthermore, the tax benefit is set at a fixed rate of 40%, compared with between 30%
and 50% previously, depending on the marginal income tax rate. By contrast in Wallonia and in Brussels these
modifications are less substantial, as that rate is now set at 45%. New tax rules will likely lead to a fall in house prices
reflecting much reduced market affordability--the loss for a household could be equivalent to 15% to 20% of the
average loan amount for higher-income households. Given that purchase transactions in Flanders represent over 60%
of the country's total and that house prices in the region are much higher than in Wallonia, the decline could be very
significant for the country as a whole. Similar changes to mortgage tax relief in the Netherlands in 2013 triggered
house price declines of 10% to 15% over two years. We believe that any declines in Belgium could be more limited,
however, given that household indebtedness is moderate and savings are among the highest in Europe. The recent
slight increase in household incomes should also restrain any decline. Furthermore, we expect financing conditions to
remain supportive: interest rates are likely to remain at very low levels in 2015 and 2016 as the ECB implements its
recently announced fully fledged QE program.
Table 2
Belgian Housing Market Statistics
2012
2013
2014e
2015f
2016f
Nominal house prices (% change year on year)
1.5
1.2
(0.5)
-3.5
-2.5
-0.1
0.2
1.0
1.1
1.3
CPI inflation (%)
2.6
1.2
0.6
0.8
1.2
Unemployment rate
7.7
8.4
8.5
8.5
8.2
Real GDP (% change)
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Table 2
Belgian Housing Market Statistics (cont.)
e--Estimate. f--Forecast. Sources: S&P, Eurostat, Banque Nationale de Belgique, OECD, Statistics Belgium.
French House Prices Are Still Falling Due To Weak Growth And High
Unemployment
We expect that house prices in France will continue to fall this year by 3% on weak economic growth, high
unemployment, and subdued consumer confidence. However, the housing market should stabilize in 2016 on
improved economic conditions (see table 3).
Recent trends
The economy stagnated through the first half of 2014 on the back of weak external demand and declining private
investment. Real GDP was flat in the first quarter and contracted by 0.1% in the second. The rebound in Q3 to 0.3%
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was in part deceptive because it was essentially caused by a strong increase in government spending (+0.8%) and in
inventories. Despite a modest improvement in business and consumer sentiment in the final part of the year, both
manufacturing and services purchasing manufacturers' indices (PMI) were still declining in December. We expect that
overall GDP growth in 2014 will have come out at 0.4% for the third year in a row. For the first time since 2011,
French economic growth will therefore have underperformed that of the eurozone as a whole, which we estimate at
0.8%.
Reflecting this broad weakness, the construction sector, traditionally a key growth engine, has also been
underperforming. Housing starts have been steadily declining since early 2012. From September 2013 to October 2014
starts reached 301,758, down 11.7% on the same period a year earlier (see chart 2). This is well below the
government's official target of 500,000 for the year, a number which has not been achieved in recent history. This
undershooting will increase the gap between insufficient supply and a strong demand for housing.
The residential real estate market has nevertheless continued to show some resilience. Initial estimates released by
real estate agencies suggest prices fell by about 3% in the 12 months to December--less than the 4% we forecast in our
July 2014 report. Total transactions amounted to 720,000, which was about 10% below levels recorded in the best
years before the global financial crisis. There are signs that negotiations on final prices between buyers and sellers
have become tougher: it took on average 95 days in 2014 to close a sale, compared with 90 days in 2013 and 78 days
in 2011.
In our view, two key factors explain why house prices posted only a modest decline in spite of the overall weak
economy. The first is the persisting imbalance between supply and demand. Excess demand is a structural factor that's
been unpinning house prices for years. The second is the dramatic fall in interest rates. In December, interest rates on
housing loans averaged 2.36%, down 72 basis points (bps) since the beginning of the year. Since the end of 2011 rates
have fallen by 163bps, equivalent to a 15.1% cut in house prices. Century 21, a real estate agent, calculated that given
the average price of a dwelling at €194,283 last year, potential buyers wanting to limit their monthly loan charges
(principal plus interest) to €1,000 a month over 20 years need make a down-payment of just €5,569, when in 2011 to
satisfy the same requirements that down payment would have been €49,638. The dramatic effect of fast declining
interest rates has allowed first-time buyers to make the beginning of a return to the market, adding support to demand
and hence to prices.
Future trends
Falling oil prices and a weaker euro exchange rate set the stage for a more positive economic outlook for France in
2015 and beyond. Low inflation has generated a slight improvement in real earnings' growth, which we estimate at
1.1% for the private sector in 2015 and 2016 (from 0.7% in 2014). The continued fall in oil prices will boost
consumption. Econometric models suggest that a $10 fall in the price of a barrel of Brent oil lifts consumption by 0.2%
in real terms after four quarters. Brent oil prices declined from a year high of $115 per barrel (/bbl) in June 2014 to
$57.3/bbl on the last day of December. On the other hand, persistently high unemployment of 10.5%--three points
above the level before the 2008-2009 economic crisis--will continue to weigh on household spending. Overall, we
expect consumption to rise by 0.9% this year and 1.4% in 2016. This, however, should be seen in contrast to 2.6% per
year recorded in the decade to 2007.
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Business investment has been the weak link in France's economic recovery, contracting by 1% in 2014. The steady
deterioration in profit margins has affected the corporate sector's ability to keep up with international competition, as
the constant drop in their global market shares illustrates. This deterioration reflects the corrosion in the industry's cost
competitiveness. Unit labor costs have been rising more quickly than in many other countries, such as Germany, and
haven't experienced any meaningful downward adjustment since 2007, as they have in Spain for instance. In addition,
French industrial firms have seen an increase in the price of their intermediate consumption of goods and services. As
a result, they've had to consent to lower margins to maintain their price competitiveness. At the start of 2014, French
nonfinancial corporate profitability was among the lowest of the major EU economies. In 2015, business confidence
should recover somewhat on the back of stronger domestic demand, and we project that capital formation will
increase by 1% in real terms. The positive impact of corporate tax relief should be more tangible in 2016, improving
business investment. Overall, we expect real GDP growth to average 0.7% in 2015 and 1.2% the following year. The
unemployment rate should stabilize at a still elevated 10.2%.
Against this background, we expect very low interest rates will continue to provide support to the housing market.
Market fundamentals, especially the affordability ratio, have improved far less than in other markets, such as the U.K.,
and in theory would justify a more pronounced correction. However, our baseline forecast is that long-term interest
rates will stay historically very low over the next 24 months as the ECB implements its recently announced fully
fledged QE program. We therefore project that house prices will fall by 3% this year, before stabilizing in 2016.
Table 3
French Housing Market Statistics
2012
Nominal house prices (% change year on year)
2013 2014e 2015f 2016f
(2.0)
(1.9)
(4.0)
(3.0)
0.0
Real GDP (% change)
0.4
0.4
0.4
0.7
1.2
CPI inflation (%)
2.2
1.0
0.6
0.9
1.4
Unemployment rate
9.8
10.3
10.2
10.3
10.2
e--Estimate. f--Forecast. Sources: S&P, Eurostat, OECD, INSEE.
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Germany's Housing Market Should Regain Momentum This Year
We expect prices in Germany's residential housing market to continue rising over the next two years, despite the
recent slowdown in growth caused above all by subdued consumer and business confidence owing to geopolitical
uncertainties in Russia and Ukraine.. Favorable economic, employment, and funding conditions all underpin higher
housing demand. We forecast prices will rise by 5.0% in 2015 and by 3.5% in 2016 (see table 4).
Recent trends
German housing market growth slackened in 2014. According to data from Europace AG, a transaction platform for
real estate loans, house price rises softened to 1.0% year on year in Q3 2014 after increasing by 1.6% the previous
quarter and by 4.6% in full-year 2013. Reflecting this softer price growth, dwellings' construction also slowed.
Construction permits issued for residential buildings declined by 3% in the first three quarters of last year on the same
period of 2013. Weaker construction activity suggests that the relative shortage of housing is not diminishing, which
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should support price momentum over the years ahead. Indeed, real building permits per capita are currently
significantly lower than their long-term average. The tightening of rent controls in certain areas that the grand coalition
government envisages could reinforce this supply bottleneck. We believe the political debate over this proposal may
already have caused some investments to be postponed.
We put the recent housing market softness down mainly to sluggish economic conditions in the country in the second
and third quarters of last year. Geopolitical uncertainty linked to crises in the Ukraine and the Middle East and slower
world trade growth temporarily paused German growth in the middle of last year. Firms cut equipment investment and
reduced inventories as a result. In 2014, GDP grew by just 1.5%.
Future trends
We think the softer housing market is only temporary and that higher activity will return as early as this year. The
macroeconomic environment remains very favorable, with positive employment and wage prospects, a high influx of
immigrants, and supportive funding conditions all underpinning higher housing demand.
The unemployment rate has fallen to a very low 4.8% (December 2014) despite the less dynamic economy.
Meanwhile, wage growth has steadily gained momentum. Added to this, net immigration to Germany totaled 437,000
in 2013, the highest in 20 years. The influx should continue in the medium term but probably at a slower pace as the
labor markets in other eurozone countries gradually recover. As the economy strengthens, employment in Germany
should remain high, boding well for household incomes. We forecast real GDP will grow by 1.1% this year, and by
1.6% in 2016 (see table 4). But risks on the forecasts are on the upside: falling oil prices and a weaker euro exchange
rate are likely to set the stage for a more positive economic outlook for Germany in 2015 and beyond.
Increasingly favorable financial conditions will further boost demand, in our view. Declining interest rates are raising
household borrowing capacity and bolstering decisions to invest in real estate. Average interest rates on new
mortgages declined to 2.23% in November 2014 from 2.90% a year earlier. We expect interest rates to continue their
downward trend given the still declining yields on German sovereign bonds, currently at 0.30% on Feb, 2. Yields are
likely to decline further, and our baseline forecast has long-term interest rates staying historically very low in the next
24 months as the ECB implements its recently announced QE program.
The German residential property market is still considered a safe haven for international investors looking for ways to
protect the value of their assets in an environment that is still uncertain and offers low returns. However, the potential
intervention by legislators in the housing market to cap rents, especially in metropolitan areas where the housing
market has been booming, could deter private investors going forward.
We don't think Germany's housing market is in danger of overheating. The recent increase in prices has occurred from
a fairly low base. Although the price-to-income ratio has trended upward since 2010, it still indicated an
undervaluation of 13% as of September 2014. What's more, over the past few years, the strong decline in interest rates
did not lead to a pronounced jump in lending volumes. Banks' mortgage lending volume remains modest, rising by
2.0% year on year in October 2014. This is because the housing market in Germany is structurally conservative:
lenders typically demand a 30% down payment, while mortgage lending rates are usually fixed at about 10 years.
Added to this, home ownership is low and the rental market is large and highly regulated. German households
continue to favor rentals, although rents have also increased since 2011 in tow of higher purchase prices.
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Table 4
German Housing Market Statistics
2012
2013 2014e 2015f 2016f
Nominal house prices (% change year on year)
4.6
3.2
3.0
5.0
3.5
Real GDP (% change)
0.6
0.2
1.5
1.1
1.6
CPI inflation (%)
2.1
1.6
0.8
1.2
1.6
Unemployment rate
5.5
5.3
5.0
5.3
5.2
e--Estimate. f--Forecast. Sources: S&P, Eurostat, Hypoport.
In Ireland, Prices Are Rising Strongly On The Economic Recovery
Ireland's housing market is making a strong recovery on the back of an improving economy and a shortage of housing
supply. However, we don't think the revival will stay as strong over the coming two years as in 2014, because the
Central Bank of Ireland has introduced stronger controls on mortgage lending to prevent house prices from spiraling
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out of control. We therefore forecast that house price rises will cool somewhat from their 16% rise last year to 9% in
2015 and 5% in 2016 (see table 5).
Recent trends
House prices rose strongly in 2014, by 16.2% year on year in November 2014 according to Central Statistics data, and
we estimate the average increase to have been 12.5% in 2014. Dublin, the capital, led the upward trend, with price
rises of 19% in 2014. Elsewhere, the residential property market recovery was more modest. Prices outside the capital
rose by 9.6% year on year in November and we estimate the annual increase to have reached 5.0%. Reflecting this
upward price momentum, the Property Services Regulatory Authority indicates that transactions were up 36% for the
country as a whole in 2014 (see chart 4).
The pick-up in house building also gained momentum in 2014. Completions grew by 35% in the first 10 months of
2014 on the same period of 2013. House guarantee registrations were 82% higher in the year to October. However, the
current construction output of about 10,000 units per year is still far below the estimated demand, at 25,000 units.
Demonstrating the supply-demand mismatch, data from Daft.ie, a property website, show that the number of
residential units for sale fell by about 25% in the year to December, to just under 30,000 homes, the lowest national
total since March 2007 and less than half the highest figure seen in 2009.
However, there are already some signs that price rises may be decelerating. Annual inflation in the capital eased from
a high of 25% in August to 22% in November. On Jan. 27, the Central Bank of Ireland introduced stricter controls on
mortgage lending. It proposed to introduce ceilings on the proportion of mortgage lending at a high LTV ratio and on
the proportion of mortgage lending at a high loan-to-income (LTI). These ceilings are stricter than those imposed in
the U.K. by the Bank of England in June 2014. For primary dwelling purchases, banks are now required to restrict
lending above an 80% LTV ratio to no more than 15% of new mortgage lending and to restrict lending above 3.5x LTI
to no more than 20% of the aggregate value. The regulations aim to "increase the resilience of the banking and
household sectors to the property market and try to reduce the risk of bank credit and housing price spirals from
developing in future". Expectations of these new rules resulted in a slight slowdown in house-price growth before
year-end, in our view.
Future trends
Against the backdrop of short supply and pent-up demand, we think that house price growth will stay high over the
medium term. Macroeconomic fundamentals also support a housing market recovery. We expect that the Irish
economy will largely outperform the euro area overall. We expect GDP to expand by 3.5% this year and 3.0% in 2016,
compared with just 1.0% and 1.4% for the eurozone as a whole. The improving labor market situation, alongside rising
employment and wages, should also support a continued increase in housing demand. We forecast that unemployment
will drop significantly to 9.7% on average in 2016.
A rise in demand amid a shortage of supply of homes, mainly in urban areas such as Dublin, will likely maintain
upward pressure on prices. The damage or bankruptcy that many building firms suffered during the financial crisis
contributed to this shortage of housing supply. Meanwhile, many existing homeowners are currently reluctant to sell as
their outstanding mortgage debt remains higher or close to the current value of their property. Despite the strong
growth rates being recorded in housing prices, prices are sill 42% below their peak and are currently at 2002 levels. In
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spite of a recent pick-up in homebuilding activity, the mismatch between supply and demand is likely to persist, so
maintaining the upward pressure on prices. The shortfall in property for sale is also pushing rents to rise. Rents rose by
8.9% year on year in October 2014.
The medium-term outlook for the market is more difficult to predict. It will be some time before the mismatch between
demand and supply is rectified and therefore some time before the market truly stabilizes. We nevertheless don't
expect the recent increase in house prices to stay as strong this year as in 2014. Despite record low mortgage interest
rates, gross mortgage lending is still low and the Central Bank of Ireland indicates that lending for house purchases
declined by 3.0% year on year in October. According to Sherry FitzGerald, a real estate agency, cash buyers
represented 51% of transactions in the first nine months of the year. Besides, the imposition of prudential ceilings on
new mortgage lending is likely to temper the recovery in the Irish property market because it will reduce the number
of eligible first-time buyers.
Table 5
Irish Housing Market Statistics
2012 2013 2014e 2015f 2016f
Nominal house prices (% change year on year)
(6.2)
6.0
16.0
9.0
5.0
Real GDP (% change)
(0.3)
0.2
4.5
3.5
3.0
CPI inflation (%)
Unemployment rate
2.0
0.5
0.3
0.9
1.2
14.7
13.1
11.4
10.4
9.7
e--Estimate. f--Forecast. Sources: S&P, Eurostat, OECD, Central Statistics Office.
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Italian House Prices Are Still Falling, But At A Slower Rate
We expect house prices in Italy to continue to fall this year by 2% amid a still uncertain economic outlook and tight
investment conditions. However, if sustained low oil prices can boost consumer spending and GDP growth, we see
scope for the housing market to turn positive again in 2016, with a 1% year-on-year rise (see table 6).
Recent trends
Despite the timid signals of recovery in house purchase transactions, Italian house prices haven't yet ended their
seven-year slide. Home sales transactions were up 4.1% year on year in Q3 2014. This resulted in nearly 410,000
transactions in the 12 months to September, after 403,000 in 2013 (see chart 5). According to Nomisma Institute,
Italy's revenue agency, purchases in Rome, Florence, Genoa, and Bologna rose more than 10% in Q3 from a year
earlier. However, house prices continued to fall in Q3 2014 on an annual basis, although at a more moderate pace of
3.8% compared with 5.3% during the same period in 2013. House prices have corrected by 24% since March 2008.
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Despite the slower decline in house prices, the construction sector is still in the doldrums. Investment in private
dwellings declined by 4% year on year in Q3 2014 on the same period of 2013, and was 31% below its March 2007
peak.
The weakness in Italy's residential property market reflects the still deteriorating domestic economy. The economy is
likely to have contracted for a third successive year in 2014, probably by 0.2%. Investment faces a difficult backdrop,
with firms facing substantial excess capacity, limited access to new credit, tight financials, and uncertain economic
prospects. Private consumption continued to grow at a modest pace on the back of increasing real gross disposable
income (+1.5% year on year in Q3 2014), but is nonetheless restrained by weakening consumer confidence related to
the uncertain economic outlook.
The ECB lending survey for Q3 2014 reported that credit supply conditions for house purchase tightened slightly.
Perceived risk is still high in connection with the reduction in the value of collateral caused by the fall in house prices.
However, household demand was increasing. Reflecting the pickup in demand, gross housing loans surged by 21% in
the 11 months to November 2014 on the same period of the previous year.
Future trends
We think a recovery in the housing market will depend mainly on the extent of any strengthening in the economy. We
forecast the economy will recover gradually, with growth returning in the first half of 2015. Sustained low oil prices
should benefit Italy both directly by boosting consumers' purchasing power and companies' margins, and indirectly by
boosting global growth, which will help Italian exports. Overall, we expect the economy to grow by 0.2% in 2015 and
0.8% in 2016. Assuming this modest firming of the economy, we expect that the contraction in house prices will ease
in the course of 2015 and start to rise modestly in 2016.
Supporting an ease in house price declines, however, the real estate market itself shows no signs of significant
overvaluation. The price-to-income ratio, a good indicator of affordability, has declined markedly from its 2009 peak
and is now close to its long-term average (see chart 5). Similarly, the price-to-rent ratio indicates a market
undervaluation of 4%. Added to this, outstanding mortgages in Italy represented 23% of GDP in Q2 2014, significantly
below the eurozone average of 38% of GDP, suggesting that households could assume more debt. Households'
borrowing capacity is likely to be supported by more favorable financing conditions. The contraction in net lending to
households should continue to ease as borrowing rates decline. Average interest rates on new mortgages decreased to
2.91% in November 2014 from 3.5% in January, and we think the downward trend is set to continue.
Table 6
Italian Housing Market Statistics
2012
2013 2014e 2015f 2016f
Nominal house prices (% change year on year)
(5.2)
(5.3)
(3.5)
(2.0)
1.0
Real GDP (% change)
(2.4)
(1.8)
(0.2)
0.2
0.8
3.3
1.3
0.2
0.3
0.9
10.7
12.2
12.8
12.6
12.5
CPI inflation (%)
Unemployment rate
e--Estimate. f--Forecast. Sources: S&P, Eurostat, OECD, Nomisma.
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In The Netherlands, High Household Debt Is Restraining Market Recovery
The revival of the Dutch housing market that started last year should continue over the next two years. We forecast
year-on-year price gains of 1.5% this year and 2.5% in 2016 (see table 7) on the back of improving economic
conditions, rising employment, and increased affordability. However, the recovery will be restrained by high household
debt and changing mortgage regulations.
Recent trends
Residential property prices rose moderately in 2014 after five years of decline. They increased 2.2% year on year in
December 2014 and 0.9% on average last year. The price increase was broad-based across all regions and types of
homes. Reflecting this increased momentum, home sales' volumes rose by 39% in 2014, to 153,500 total transaction,
the highest number since mid-2009.
Several factors supported this return to growth. Confidence in the housing market has returned as households'
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assessment of the economic situation improves. The labor market improved, and the unemployment rate fell to 6.5%
in November from a peak of 7.2% in March 2014. Improved chances of finding a job are supporting consumer
confidence and releasing pent-up demand. Also underpinning the house-price rebound is increased affordability of
homes. The price-to-rent ratio was only 2% above its long-term average in December 2014, from 51% in September
2008. This is because the government has loosened restrictions on rent rises, making it easier for landlords to increase
rents for higher earners. As a result, the average rent increase was 4% in the regulated rental segment in 2013 and
2014. Further adding to house buyers' confidence is more political clarity about the tax treatment of home ownership.
Since 2013, first-time buyers have only been eligible for tax deductibility on their mortgages if they take out a straight
annuity repayment mortgage (instead of the formerly popular interest-only mortgage). Lastly, very low interest rates
are driving the housing market recovery. Mortgage gross lending expanded by 23% in the first 10 months of 2014 on
the same period of 2013. Interest rates for new housing loans declined to 3.16% in November last year, down 48 bps
from the end of 2013.
Future trends
We think that house prices will continue to increase moderately this year and in 2016. While further economic
recovery and low borrowing rates are supporting house-price rises, negative factors such as an end to or scaling back
of stimulus measures and credit-restricting measures are weighing on the recovery.
We anticipate that economic activity will slowly improve, with a mild recovery expected this year and beyond. We
expect GDP will grow by 1.0% this year and 1.3% in 2016. Meanwhile, business investment spending rose by 1.6%
year on year in Q3 2014 for the fourth consecutive quarter. Sentiment among manufacturers increased for the third
month running in December. As a net oil importer, the Netherlands should benefit from sustained low oil prices, while
a weak euro will support exports. However, we expect that private consumption will remain under pressure in the near
term because Dutch consumers are reluctant to spend on the back of falling real wages, tight fiscal policy, and high
debt. The Netherlands' household debt ratio is the highest in the eurozone, at 115% of GDP in June 2014, and it only
started to decline since 2012. Such high leverage translates into negative home equity for many households. Data from
Statistics Netherlands show that at the start of 2014, one-third of homeowners had a net mortgage debt higher than the
value of their home.
On the upside, low mortgage rates will put upward pressure on prices. Our baseline forecast has long-term interest
rates staying historically very low in the next 24 months as the ECB implements its recently announced fully fledged
QE program until at least September 2016.
Temporary factors, such as gift tax exemption, played an essential role in last year's market revival. Their reduction or
phase-out this year will likely weigh on the number of home sales. Until the end of last year, gifts up to €100,000 were
tax free on condition that the money is used to purchase a home or repay mortgage debt. As the measure has proved
much more popular than anticipated, the government has decided against further extending the temporarily expanded
gift tax exemption, bringing the tax exemption for gifts back down to about €52,000.
A recent DNB study showed that tightening credit conditions had a big impact on house price declines between 2009
and 2012. Changing mortgage regulations will weigh on loans granted for homes. Rules reducing the maximum
amount that home buyers may borrow on the basis of income, and setting a maximum LTV ratio on properties will
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restrict loans. Since Jan. 1, 2015, the LTV ratio has fallen to 103% and is expected to decline further to 100% by 2018.
European policymakers are keen to see LTV ratios decline further to 80%. This suggests that potential home buyers
will need to put aside extra funds to pay additional fees and taxes related to buying a home. In addition, the
government intends to lower loan-to-income limits on the size of mortgages, constraining mortgage borrowing power.
Table 7
Dutch Housing Market Statistics
2012
2013
2014e
2015f
2016f
Nominal house prices (% change year on year)
(7.6)
(4.3)
2.2
1.5
2.5
Real GDP (% change)
(1.6)
(0.7)
0.8
1.0
1.3
CPI inflation (%)
2.8
2.6
0.3
0.7
1.1
Unemployment rate
5.3
6.7
6.8
6.4
6.4
e--Estimate. f--Forecast. Sources: S&P, Eurostat, Kadaster, OECD, CBS Statistics Netherlands
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Portuguese House Prices Are Slowly Improving, Not Least Due To Foreign
Demand
We forecast house-price growth will remain sluggish this year, expanding by 1.0% year on year, and accelerating
somewhat in 2016 (see table 8). Domestic demand is still constrained, and foreign demand will not prove strong
enough to lift house prices more significantly, in our view.
Recent trends
The Portuguese housing market stabilized in 2014 after three years of price declines. Residential property prices rose
on average by 0.2% in 2014 in the country, according to INE statistics. Prices grew more strongly in the Lisboa region
(+0.6%), but continued to fall in the Madeira and Azores islands by 2.7% and 9%, respectively. The December RICS
Portuguese housing market survey showed strengthening sales and market confidence, with leading indicators
suggesting rising optimism. Sales agreements increased for the 12th consecutive month during December. Still, this
improving sentiment is not yet reflected in construction activity. Completions of new family housing units plunged by
55% in the first three-quarters of 2014 on the same period of 2013. Nevertheless, the number of construction permits
has been stabilizing, suggesting construction activity may improve in 2015. Permits issued for residential buildings
remain, however, at an extreme low of 550 units per month (or 6,600 per year), compared to 100,000 per year in 2000.
Portugal's banking system is still fragile as it continues to accommodate the correction of the economy's high
dependency on external funding. Banks remain dependent on the ECB to roll over debt maturities previously funded
by external investors. Total national central bank resources were 7% of system assets in November 2014. Despite the
falling cost of funding, the banking system is deleveraging. As a result, net housing loans have declined steadily since
the end of 2011 (see chart 7), while gross lending is still very low at about 170 million per month, compared to 1,550
million a month between 2004 and 2007.
We think that the main reasons the housing market is stabilizing are that demand from foreign investors is increasing
and economic conditions are improving. The government scheme granting a five-year residency permits to non-EU
citizens who buy properties of at least €500,000 attracted €1.1 billion in property purchases by foreign investors
between October 2012 and December 2014, according to the Immigration and Borders Service. Eighty per cent of the
2,022 permits have been issued to Chinese citizens.
Renewed investor interest in Portuguese real estate also reflects the country's recovery. GDP rose by 0.3% in Q3 2014,
quarter on quarter, driven by strong private consumption and investment spending. With the exception of a
contraction in Q1 2014, the Portuguese economy has continuously expanded on a quarterly basis since the start of
2013. Meanwhile, the unemployment rate fell sharply from 15.1% in January last year to 13.9% in November. An
improved domestic economy, alongside ECB measures, have brought more favorable bond market conditions.
Future trends
We expect the economic recovery to continue this year and to accelerate in 2016. Leading indicators still point to
improving underlying fundamentals, despite some faltering in the latest surveys. Improving confidence and a
stabilizing economic situation are starting to feed into firms' employment and investment spending. Nevertheless, the
economy still faces several headwinds. Unemployment, although falling, is still high and credit conditions are still tight.
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Although low inflation has some positive implications, it also increases the economy's considerable debt burden.
While mortgage interest rates are declining in tow of record low sovereign bond yields in recent weeks and the ECB's
recently announced fully fledged QE program, we think households will be reluctant to take on more debt, particularly
in an environment of still high unemployment. Household debt was 82% of GDP at the end of Q3 2014.
In the longer run, the market may benefit from more positive structural factors. First, Portugal didn't experience a
house price boom that swept through many OECD countries from the mid-1990s to 2006. Portugal's housing market
performance has been lackluster throughout the last decade, and even negative in real terms, with no signs of a bubble.
The affordability index (price to income) continued to hover around an all-time low in Q3 2014, showing an
undervaluation of 7%. Meanwhile, the price-to-rent ratio is in freefall. The housing rental market reforms made the
market more dynamic, with rental contracts being gradually upgraded to near-market rates. These legal changes have
attracted foreign investors, especially in large cities, such as Lisbon or Porto. Since 2011, rents have been rising, while
at the same time purchase prices declined. As a result, the price-to-rent ratio reached an all-time low in September
2014, suggesting that the market may be undervalued by 18%.
Table 8
Portuguese Housing Market Statistics
2012
2013 2014e
2015f
2016f
Nominal house prices (% change year on year)
(2.7)
(3.0)
(1.0)
1.0
1.5
Real GDP (% change)
(3.3)
(1.4)
0.9
1.3
1.7
2.8
0.4
(0.2)
0.4
0.8
15.8
16.4
14.1
13.6
13.0
CPI inflation (%)
Unemployment rate
e--Estimate. f--Forecast. Sources: S&P, Eurostat, BIS/private sector.
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Spain's Housing Market Is Starting To Heal As The Economy Rebalances
House prices in Spain are stabilizing on the back of the country's gradual economic rebalancing and improving
consumer and business confidence. After the heavy price slump in recent years, we expect the housing market will
hold flat this year, but gain by 2% in 2016 (see table 9). Still high unemployment and unfavorable demographic trends
will keep the lid on higher price gains.
Recent trends
The Spanish economy continued to outperform the rest of the eurozone in the second half of 2014. The strong
bounce-back in PMI indices, both in services and manufacturing in December after some weakness a month earlier
was consistent with the first estimate of GDP growth in the final quarter of the year of 0.7%, corresponding to a 2%
year-on-year increase, the highest since Q2 2008. For 2014 as a whole, GDP grew 1.4%, from -1.2% a year earlier.
Reflecting better economic conditions, the labor market also continued to improve, with the jobless rate down to
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23.7% in Q4 2014 from 25.7% a year earlier and employment up 433,900 over the same period.
This enhanced performance reflects the gradual rebalancing of Spanish growth since the beginning of the global crisis.
The construction sector is no longer the prime growth engine, accounting for 5% of total GDP and 5.8% of total
employment, from a peak of 10.5% of GDP in 2005 and 13.4% of employment in 2007. By contrast, exports have been
leading the economic recovery: the current account balance recorded a surplus in 2013 for the first time since 1994.
Against this more positive backdrop, Spanish residential markets continued to heal. Nominal prices have been
declining at a slower pace, down 2.6% year on year in Q3 2014, from 5.3% a year earlier, driven by a pickup in
demand. Housing loans were up an impressive 18% in the 12 months to October. The turnaround in credit growth
since February 2014 was remarkable. In turn, housing sales volumes were up 16.2% year on year in October. As in
other eurozone countries, the continued decline in interest rates aided this rise, making house purchases more
affordable, especially for first-time buyers.
Future trends
We expect that the economic recovery will continue to gain momentum this year. The weaker euro will underpin
export growth, while the import bill will contract on the back of cheaper energy. Lower oil prices will also lift consumer
spending power, although we expect only a modest acceleration in household consumption from the rebound already
seen last year. Business confidence also appears to be steadily regaining ground, leading us to expect a pick-up in
corporate investment in 2015 and 2016.
Against this background, the housing market should continue to heal. After a sharp improvement in market
fundamentals in the past few years, the price-to-income ratio is now only 10% above its long-term average. Very low
interest rates will also remain supportive. Still, we don't expect any meaningful rebound in house prices yet. First, the
jobless rate remains among the highest in the eurozone in spite of a recent improvement, with unemployment
particularly high among young people. Second, demographic trends are unlikely to support the market in the
foreseeable future. According to the Spanish statistical office, the cohort of 25 to 35 year-olds will contract by 35%
over the coming decade as a result of past declines in fertility rates and continued migration flows. This all points to a
stabilization of house prices over the next two years.
Table 9
Spanish Housing Market Statistics
2012
Nominal house prices (% change year on year)
Real GDP (% change)
CPI inflation (%)
Unemployment rate
2013 2014e 2015f 2016f
(10.4)
(4.6)
(2.0)
0.0
2.0
(1.6)
2.4
(1.2)
1.4
1.9
2.1
1.5
(0.2)
0.1
0.5
24.8
26.1
24.5
22.8
22.3
Sources: S&P, Eurostat, Banco de Espana, OECD
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Swiss House Prices Are Cooling On Tighter Lending Rules And Fewer Foreign
Investors
We expect house prices in Switzerland will dip slightly this year, owing to recent macro-prudential measures along
with the renewed appreciation of the Swiss franc. The recent decision by the SNB to increase negative interest rates on
sight deposits and discontinue the exchange rate ceiling of the Swiss franc to the euro will be twofold. On the one
hand, the strengthened Swiss franc will likely lead to a decline in foreign demand for upscale real estate assets, in our
view. On the other hand, we expect housing demand to be less affected because it will lead to an even lower interest
rate environment, while investment alternatives for households are limited. Given the strength of the Swiss economy,
we don't expect house prices to fall markedly. We therefore expect house prices to fall by just 1% this year and to
recover to 1% growth in 2016 (see table 10).
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Recent trends
Housing market inflation slowed in 2014, according to SNB data, both in the rental and owner-occupied markets.
Prices of rental apartments expanded by 2.2% on average in 2014 compared with 2.9% the previous year, and 3.1% in
2012. Prices for owner-occupied apartments increased by 2.3% in 2014 compared to 3.3% in 2013, while for
single-family homes they only picked up by 1.3% in 2014 after surging by 4.7% in 2013. There were, however, large
regional differences in the pace of market cooling. Momentum slowed most in high-priced regions in the Leman
region, with rental apartment prices up 0.6%, after 3.1% in 2013, or around Zurich (0.3% after 3.4% in 2013).
Meanwhile, price growth remained above 2% in central and north-western Switzerland.
On Jan 15, 2015, the SNB decided to discontinue the exchange rate Swiss franc (CHF)1.20 ceiling to the euro, which
had been in place since September 2011 to stop currency appreciation and to safeguard the economy's
competitiveness. At the same time, the SNB lowered interest rates on sight deposits placed with SNB to -0.75% from
-0.25%. As a result, the Swiss franc appreciated by 14% against the euro on the same day and was settling at just
CHF1.05 to the euro on Feb. 2. The central bank's move and the subsequent currency appreciation will likely add to
the country's existing deflationary pressures, in our view. Swiss consumer prices fell 0.3% year on year in December,
after falling--or at best barely rising--since late 2011. We believe the SNB will continue to ease its monetary policy in
the event of further currency appreciation. However, given the strength of the economy and recently rising core
inflation, we don't think currency appreciation will trigger a deflationary spiral.
What's more, we think currency appreciation will have only a limited effect on Switzerland's competitiveness. At the
end of 2014, the real effective exchange rate, a measure of competitiveness, had returned to the level of the beginning
of 2011 due to low inflation and the depreciation of the Swiss franc against the U.S. dollar last year. Switzerland posted
a record high trade surplus at the end of 2014 and unemployment remains low at 3.2%, reflecting the strength of the
economy.
As a result of recent SNB decisions we don't expect the economy will go deep into recession over the next two years,
although unemployment rates could slightly increase. We expect that financing conditions will remain supportive over
the next 24 months. Mortgage interest rates continue to decline: five-year fixed interest rates were 1.42% in September
2014, down from 1.9% a year earlier.
Future trends
Regulatory changes will cool the housing market, in our view. Regulatory measures will continue to lead to a
deceleration in mortgage loan growth and price increases. The Swiss regulator's initiatives to curb credit-driven house
price inflation include tighter guidelines for granting new mortgages, compulsory amortization, and higher regulatory
risk weights for mortgage lending above certain LTVs since July 2012, which aim to narrow the range of potential
buyers. We recognize that besides house prices, mortgage loan growth has also slowed somewhat since the beginning
of 2014. However, it is important to note that household mortgage debt has grown quickly and was at a level of 103%
of GDP in September 2014. This is among the highest rate in Europe, well above the eurozone average of 38%. We
believe the regulator's countercyclical capital buffer, which the Swiss regulators increased to 2% from 1% of
risk-weighted mortgage assets in June 2014, will somewhat constrain new mortgage lending. Mortgage loan growth
slowed to 3.4% year on year in September 2014 from 5.0% on average in 2013, suggesting that the effects of these
measures are gradually unfolding. In general, we expect the Swiss regulator's initiatives on new mortgage lending,
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amortization, and capital requirements to lead to a lower number of new house purchases, and potentially less private
sector lending growth over the coming two years.
A second factor cooling the market is that housing is becoming less affordable. Property prices, especially in the
Geneva and Zurich areas, have risen faster than incomes since 2007. Even so, current prices don't look overvalued
when compared to the long-term average of income and rents. Following a boom in the late 1980s, housing prices fell
dramatically, and their subsequent growth was subdued relative to growth in rents and in income until the late 2000s,
when housing price growth accelerated. Although price-to-income ratios suggest that affordability has declined (see
chart 9), the market was still undervalued by 8% at the end of last year compared to the long-term average, against
24% in December 2007. The price-to-rent ratio suggests no market undervaluation--it now stands at its long-term
average. Both price-to-income and price-to-rent ratios are still well below the levels reached at the peak of the
previous boom.
Nevertheless, demand continues to outstrip supply in some parts of the country, mainly in large urban areas, in spite of
increasing construction. A solid labor market, supported by high immigration, is benefiting housing demand. Net
immigration is high and has only slightly diminished despite the "yes" vote to an initiative against mass immigration in
February 2014. Between September 2013 and August 2014 net migration reached 78,000 people against 83,800 over
the same period of 2013. The ultimate impact from the February 2014 referendum to limit labor immigration in
Switzerland will depend on the definitive arrangements, which have yet to be negotiated with the EU. In the medium
term, we think the vote could increase economic uncertainty, which in turn could cut housing investments and slow
immigration flows and employment growth.
On the supply side, investment in housing construction has increased by 9% year on year in the first three quarters of
2014. Meanwhile, according to the Vacant Dwelling Survey conducted by the Swiss Federal Office of Statistics on June
1, 2014, the dwelling vacancy rate was at 1.08%. This is the first time since 2008 that vacancies exceeded 1%, but the
rate is still below its long-term average.
Table 10
Swiss Housing Market Statistics
Nominal house prices (% change year on year)
Real GDP (% change)*
CPI inflation (%)*
Unemployment rate*
2012
2013
2014e
2015f
2016f
3.6
4.6
0.5
(1.0)
1.0
1.0
1.9
1.3
1.7
2.1
(0.7)
(0.2)
0.0
0.0
0.7
2.9
3.2
3.1
3.0
2.8
*December forecasts before SNB decision to discontinue exchange rate ceiling of the Swiss franc to euro. e--Estimate. f--Forecast. Sources: S&P,
Eurostat, OECD, Department for Communities and Local Government.
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U.K. House Price Growth Is Slowing Due To Deteriorating Affordability
Balancing the positive effects of very low interest rates and a still robust economy with the more negative influence of
tighter lending criteria and a less affordable market, we expect further moderation in U.K. house-price growth in the
coming two years, with rises of 4.0% in 2015 and 3.0% in 2016, from 7% in 2014 (see table 11).
Recent trends
The U.K. has been the fastest-growing economy in the G7 since the beginning of 2013. In 2014 it markedly
outperformed the eurozone, with growth averaging 2.6% versus 0.8% on the continent. This recovery has been
reasonably balanced across domestic demand: capital formation accounted for almost half of cumulative GDP growth
since the second quarter of 2009, while consumer demand reached its pre-crisis peak in Q3 2014. Exports, on the other
hand, have disappointed and net trade hasn't contributed at all to GDP growth in the past few years.
This recovery was initially "job rich, cash poor": the unemployment rate fell rapidly to 6% in Q3 2014 from a 8.4% peak
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in Q3 2011, while real earnings' growth remained negative. However, mounting evidence that the labor market is
tightening and recruitment difficulties growing in some sectors (IT, engineering, and construction) is feeding into a
steady pickup in wage growth. Regular private sector pay rose by 1.6% in the three months to September, slightly
ahead of inflation. The 3% hike in the minimum wage rate for adults implemented in October was the largest in the
past five years and should somewhat contribute to wage growth acceleration over the coming quarters.
Key to the prospects for the residential real estate market, this recovery has been taking place on the back of a strong
boost in house building. Housing starts were up 16.7% in the 12 months to September, although they still haven't
recovered their pre-crisis peak of Q4 2007.
The more moderate trend in house market activity that was becoming apparent last summer has since been confirmed.
According to estimates from the Halifax, a mortgage lender, annual price growth eased to 7.8% in December from a
peak of 10.2% in July. Our July forecast for 2014 had house prices rising 7%. Home sales were below 100,000 in
November for the first time since November 2013 and mortgage approvals were down 13.1% in the 12 months to
October. Following the Mortgage Market Review earlier last year, new rules have been introduced leading to a
tightening in underwriting standards. More generally, the Royal Institute of Chartered Surveyors (RICS) noted in its
latest (December) release that market conditions as measured by the ratio of house sales to the stock of unsold
properties had been steadily easing in the second half of last year.
Future trends
We expect GDP growth in the U.K. to average 2.7% and 2.5% in 2015 and 2016, respectively. The plunge in oil prices
will boost household purchasing power. Meanwhile, business surveys continue to point to improved corporate
confidence, and capital formation is likely to remain very supportive of economic growth.
The timing of the next move by the Monetary Policy Committee (MPC) of the Bank of England is a key uncertainty
affecting the short- to medium-term outlook for the housing market. CPI inflation fell to 0.5% in the 12 months to
December, from 1% a month earlier. Petrol prices alone fell 4.5% in the month, while food prices remained weak.
Headline inflation is likely to fall further in the coming months. Weakness in import prices will bear down on inflation.
As downside risks on oil prices remain high, there's even a possibility that headline inflation turns temporarily negative
by the middle of this year. Stronger wage growth and further declines in unemployment would fulfil the criteria the
MPC set for interest rates to start rising. On the other hand, a rate hike at a time when inflation is so low would be a
difficult sale. We think the first hike isn't likely to take place before the fourth quarter of this year, and we see a
possibility that it will only take place in Q1 2016.
This interest rate outlook will be very supportive for the housing market. Key mortgage rates have been steadily falling
in 2014. As 85% of new mortgage loans are now fixed for one to five years and 64% of new mortgage loans have LTV
ratios of 75% or less, the average rate on a two-year fixed loan with a 75% LTV ratio has become the main benchmark
rate. It reached 2.08% last December, down 52bps since the middle of the year, to a record low. In addition, the U.K.
household balance sheet has improved meaningfully in the past years: according to the Bank of International
Settlements (BIS), the overall private debt-to-GDP ratio has fallen 44 points since 2009, from 210% to 166%.
On the other hand, we've seen a fresh deterioration in the housing market's fundamentals in 2014. With earning growth
picking up only very slowly, the affordability ratio (price to income, see chart 10) has deteriorated through 2014.
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Economic Research: Low Interest Rates Are Only Slowly Reviving Europe's Housing Markets
These factors all point to a moderation in house-price inflation over the coming two years.
Table 11
U.K. Housing Market Statistics
2012
2013
2014e
2015f
2016f
Nominal house prices (% change year on year)
2.3
5.4
7.0
4.0
3.0
Real GDP (% change)
0.7
1.7
2.6
2.7
2.5
CPI inflation (%)
2.8
2.6
1.5
1.5
1.7
Unemployment rate
8.0
7.5
6.3
5.4
5.3
e--Estimate. f--Forecast. Sources: S&P, Eurostat, OECD, Department for Communities and Local Government.
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Economic Research: Low Interest Rates Are Only Slowly Reviving Europe's Housing Markets
Additional Contact:
Dirk Heise, Frankfurt (49) 69-33-999-163; [email protected]
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