In the main European capitals, houses are becoming cheaper, but not enough to compensate for families’ loss of purchasing power. This is the future that the rating agency Moody’s describes in an analysis published on Wednesday. The report looks at a dozen Western European capitals, including Madrid. And it concludes that the increase in the cost of living due to inflation and the increase in interest rates due to the change in the European Central Bank’s monetary policy will weigh more heavily on households than cheaper housing.
The first evidence for Moody’s experts is that housing in most capital cities is more unaffordable than ever. This is not the case in Madrid (nor in Rome and Dublin) as the effects of the housing bubble at the beginning of the century still loom large and buying a house required even more effort until 2010. But unlike in Italian and Irish cities, as well as Milan and Paris, housing in the Spanish capital has become more unaffordable since the pandemic, consistent with what has happened in other markets where prices have risen in recent years are.
The report measures the amount of effort in years of household disposable income that would be required to purchase a home, taking the average for each location in both references. In Madrid it is more than 15 years, behind Amsterdam (more than 25 years), London (close to the same mark), Paris and Dublin (both approaching 20 years) and Frankfurt with a slightly higher rate. However, the situation is comparatively better in Lisbon, Berlin, Milan, Stockholm and Rome.
If we talk about real estate prices putting pressure on households, the situation is most painful “especially among first-time home buyers,” the authors of the analysis emphasize. The rise in interest rates is making it difficult for those who bought a home with credit to pay the bills. The reason for focusing on big cities is because “mortgages are larger” there and that means “even small interest rate increases can significantly increase households’ monthly payments.” In addition, there is a segment of the middle- and low-income population who cannot afford to buy and have no choice but to rent.
This in turn causes the granting of mortgages to slow down – in August 22.7% less were granted in Spain than in the same month of 2022, according to the latest statistics from the INE published this Wednesday – because it There are more potential customers who do not meet the banks’ requirements for granting loans. And this general slowdown in the market will help drive down property prices.
In this case, some of the cities analyzed already exist. In Amsterdam, housing became almost 5% cheaper in the first half of this year. And in Frankfurt it is almost 6.5%. But it’s not enough, and it doesn’t look like it will be. Moody’s estimates that in the same cities prices would have to fall by 24.6% and 31.5%, respectively, to offset families’ loss of purchasing power and not increase the expense ratio. They are the most extreme examples alongside Berlin, where the decline would have to be almost 30%. In Madrid, just under 7% would be enough, the lowest percentage after Dublin (-5.6%) and on a par with Paris or Milan. “We assume that property prices will continue to fall in some, but not all, major European cities in 2024,” the analysis says. And it takes away any optimistic expectations from potential buyers: “The expected declines will be significantly smaller.” [que las que calculan que serían necesarias] and they will not be enough to improve affordability.”
One of the reasons they believe this will not happen is the lack of living space due to lower construction activity. Activity is declining because falling prices and high inflation are shrinking margins for development companies, although Moody’s cautions that those dedicated to creating housing for the wealthiest demand will see their profits fall less sharply. And he notes a positive outcome for Spain, which he cites as an example of “countries where construction activity is more resistant.”
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