Fitch Ratings predicts a change in the European housing market in 2023, with home prices expected to either fall or experience low-single digit growth. The countries expected to be most affected are those that have seen the strongest price growth in recent years.

Rising mortgage rates and inflation are eroding affordability and demand, leading to the slowdown or reversal in price growth. Late-stage arrears are also expected to increase in the latter half of 2023, although healthy labor markets and responsible underwriting practices will keep them from rising significantly.

Denmark is expected to see the largest decline in home prices in Europe, with a drop of between -10% to -7%. The UK, Netherlands, and Germany are also expected to see declining prices, with drops ranging from -7% to -2%. While these declining prices may partially reverse the rapid price appreciation seen during the COVID-19 pandemic, it marks a shift in the European housing market in 2023.

Navigating the European Housing Market: Supplying Stability in the Face of Uncertainty

The future of the European housing market remains a source of uncertainty, as rising mortgage rates, high inflation, and a lack of economic growth pose significant challenges. Despite these obstacles, the continued constraints on housing supply will offer some support to home prices, while lenders and servicers are expected to adopt cautious strategies to minimize the risk of foreclosures or forced sales.

However, the impact of these economic factors on demand and mortgage performance is expected to be felt in the UK and eurozone, as seen in the deteriorating asset performance outlooks for 2023. Borrowers with high loan-to-value ratios in the UK and those with floating-rate loans in Spain are at particularly high risk as mortgage rates rise.

The consequences of inflation or interest rate increases beyond current forecasts could lead to significant price corrections and increased arrears, with impacts felt well beyond 2023.