Investing in The European Property Market

The European real estate market has seen several years of strong growth. In fact, since early 2016, house prices in the EU have risen by 4.6% year-on-year on average, outperforming wages and GDP growth. This upward trend has been widespread across countries and also large cities. Find out about the factors underpinning this trend and whether it poses any risks for your investments.

Housing affordability in large European cities:

In general, the main housing affordability indicators show no signs of widespread tension in Europe’s property markets, the exceptions being the Netherlands, Austria, Denmark and Belgium.

In short, most European countries do not show any evident signs of overvalued property prices compared with domestic demand. However, some countries such as the Netherlands, Austria, Denmark and Belgium could be at risk should house prices continue to grow at the same rate or even faster, as their prices are already at an all-time high. The case of Sweden and the UK warrants particular attention since, after several years of booming house prices and some overheating in the sector, growth has now eased due to factors such as political uncertainty, problems with affordability and fewer tax breaks when buying a home.

The affordability ratios of large cities are getting tight, a reflection of the decoupling of house prices and local income. The ratio is particularly high in London, Paris, Milan and Munich. In other cases, prices seem to be slightly higher than those justified by domestic demand, such as in Vienna, Oporto and Barcelona. As we’ve already noted, this is due to several factors, such as the influence of foreign buyers and global and institutional investors, generally with a greater buying capacity than the average local population. Such dynamics mean that a close eye should be kept on the trend in housing markets at a local level, compared with the rest of the country but also with other countries.

In short, with the exception of some particular casesthere are no clear signs of overvaluation in European property markets. Also, the financial situation of European households is relatively comfortable. However, in large cities there is a certain decoupling between house prices and the income of the local population, partly because of the greater weight of foreign demand. Given the current economic slowdown in many European countries, greater house price synchronicity across countries and cities raises doubts about the consequences of an eventual correction in prices as closer links (exposure of local markets to global financial and economic conditions) may transmit or amplify financial and macroeconomic shocks.

In this regard, because of the increasing importance of foreign demand and greater vulnerability of the housing market to the world’s financial and economic cycles, the capacity of local authorities to manage imbalances in the property market could now be more limited than in the past.

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EuropeanLife Magazine 2021