Rising eurozone mortgage rates threaten house price growth
Eurozone mortgage rates are rising sharply, raising the prospect of a housing market slowdown after government support provided during the pandemic and a desire for more space sparked a spike in housing prices immovable.
The cost of new loans to households for the purchase of a home rose by 16 basis points between May and June to reach 1.94%, according to data from the European Central Bank released on Tuesday. Average rates are now 64 basis points above last September’s low of 1.3% – the biggest increase in borrowing costs over a nine-month period since 2006.
Mortgage rates are rising in advanced economies as central bank overcollateralization rates rise in an effort to control inflation, increasing the risk of falling prices. In the UK, the average rate for new mortgages has risen by 65 basis points to 2.15% since the autumn of last year. In the United States, Freddie Mac’s benchmark 30-year mortgage rate is above 5%, up from below 3% in the summer of last year.
Andrew Kenningham, chief economist for Europe at Capital Economics, called the rise in the eurozone “striking”. He added that higher borrowing costs would be an additional headwind for households, which have seen their disposable income crushed by soaring energy and food prices over the past year. “This is one of the factors that we believe is likely to push the eurozone into recession in the next six to nine months.”
ECB data showed that mortgage rates rose fastest in Germany and Italy, with smaller increases recorded in France and Spain. In Germany, the average mortgage rate rose by more than one percentage point, rising from a recent low of 1.16% to 2.25% in June. In Italy, there was an increase of 72 basis points to 1.97% from the recent low of 1.25%.
Tariffs have increased for most product types. The largest monthly increase was recorded for mortgage rates with terms of five to ten years, which increased by 21 basis points between May and June to reach 2.23%.
Mortgages are expected to become more expensive in the coming months following the ECB’s decision to raise its benchmark deposit rate by 50 basis points to zero at the end of July – a bigger decision than expected. Another 50 basis point hike is forecast for September after inflation hit a new high of 8.9% in the year to July – a new all-time high for the currency area and more than four times the central bank’s 2% target.
Markets are also expecting monetary policy tightening in the UK and the US. They put the odds of a 50 basis point rate hike at Thursday’s Bank of England meeting at 88%, with further increases expected at future US Federal Reserve meetings.
Rising rates are expected to slow the boom in the housing market – the result of historically low interest rates, fiscal measures to stimulate activity and strong demand for larger properties with outdoor space due to the more large number of people working from home.
“We expect the housing market to slow significantly in response to the sharp rise in mortgage rates,” said Oxford Economics economist Oliver Rakau. “Going forward, higher rates and tighter bank lending conditions indicate that loan flows are expected to slow sharply.”
Annual house price growth in the euro zone reached a record high of 9.8% in the first quarter of 2022. While price growth is expected to slow in the coming quarters, economists see a crash as unlikely.