Eurozone house prices rise for first time in more than a year

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Eurozone house prices have risen for the first time in more than a year, according to official statistics that suggest lower mortgage rates are fuelling a recovery in the region’s property market.

House prices in the currency union increased 1.3 per cent in the second quarter from the same period a year ago, according to data published by Eurostat on Thursday. The growth follows four consecutive quarters of annual contractions.

Demand in the European property market plunged as the cost of home loans increased from early 2022. But mortgage rates have declined this year on expectations that the European Central Bank would cut interest rates. The ECB’s key deposit rate stands at 3.5 per cent after it reduced rates in June and September, with investors anticipating another quarter-point cut next month.

“Eurozone house prices are beginning to finally recover,” said Tomasz Wieladek, chief European economist at investment company T Rowe Price, adding that “mortgage affordability has improved significantly” as a result of a resilient labour market and a large rise in disposable income as energy prices have fallen.

Franziska Biehl, an economist at ING, said that in addition to lower mortgage rates, the residential property sector’s recovery was supported by higher salaries. Wages are growing at a faster rate than inflation, according to official statistics.

Separate figures released on Wednesday by the ECB showed that the average mortgage rate on new deals declined to 3.7 per cent in August from more than 4 per cent last November. The average was 1.3 per cent in January 2022.

The ECB began raising rates from 2022 in response to a surge in inflation, pushing up mortgage costs. However, Eurozone inflation fell to 1.8 per cent in September, dropping below the ECB’s medium-term target of 2 per cent for the first time in three years and paving the way for more interest rate cuts.

Compared with the previous quarter, Eurozone property prices were up 1.8 per cent in the three months to June, the fastest quarterly increase in two years, Eurostat data showed. In the hard-hit German housing market, which has suffered seven quarters of contraction, house prices rose 1.3 per cent quarter on quarter. House prices in Europe’s largest economy are still 12 per cent from their 2022 peak despite the latest rebound, and fell 2.6 per cent from the same period a year ago.

Above-average annual price increases were reported in many markets, with the Netherlands, Spain and Portugal all reporting price growth near 8 per cent in the second quarter. Annual prices rose 10 per cent in Croatia, the currency bloc’s newest member.

House prices also returned to growth in Italy, where they have lagged behind the region’s average over the past five years.

However, French house prices were 4.6 per cent below their levels a year ago.

Andrew Kenningham, economist at consultancy Capital Economics, said further price rises would be modest as lower ECB borrowing costs were already reflected in mortgage rates and the wider economic backdrop for the Eurozone was “poor”.

“We don’t expect house prices to surge,” he said. “Germany is struggling with declining competitiveness and France [is] facing a period of austerity.”