Housing becomes less attractive as an investment, says ECB

Housing has become less attractive as an investment for euro area consumers since the second quarter of 2022, due to expectations of rising inflation and mortgage interest rates, says ECB.

Households’ perception of housing as a good investment “fell from a peak in the second quarter of 2021 to a trough in the first quarter of 2023”, European Central Bank (ECB) economists say in a box in an economic bulletin, published on Thursday.

The perception fell significantly in 2022, but has stabilised since late 2022, the decline was due to expectations of higher mortgage rates, which were compounded by expectations of rising near-term inflation in early 2022, slower economic growth and falling house price growth in late 2022.

“Since the beginning of the year, this perception has recovered somewhat, but remains at low levels,” ECB economists add.

Rising mortgage rates are playing the biggest role in making housing less attractive as an investment.
“Expectations of higher mortgage rates induced households to view housing as a much less attractive investment,” the ECB adds in the economic bulletin.

Rising mortgage rates are playing the biggest role in making housing less attractive as an investment.
“Expectations of higher mortgage rates induced households to view housing as a much less attractive investment,” the ECB adds in the economic bulletin.

The ECB has raised its interest rates since July last year by 425 basis points to 4.25 per cent to curb inflation.

The tightening of monetary policy and financial conditions in general has had an impact on household sentiment.

Two factors are weighing on housing demand: the negative effects on real income of higher inflation and the effects on disposable cash flow of higher debt servicing costs.

“Expectations for 12-month forward mortgage and savings account rates have risen by almost 2 percentage points and 1.5 percentage points, respectively, since the beginning of 2022,” according to figures in another box in the ECB’s bulletin.

The percentage of respondents expecting greater difficulty in obtaining credit (of any kind) rose steadily from the beginning of 2022 until October 2022 and has fluctuated around 30 % since then.