Eurozone mortgage rate rises threaten house price growth

Eurozone mortgage rates are rising sharply, raising the prospect of a slowdown in the housing market after government support provided during the pandemic and a desire for more space triggered a surge in house prices.

The cost of new loans to households for house purchases increased by 16 basis points between May and June to 1.94 per cent, according European Central Bank data published on Tuesday. Average rates are now 64 basis points above the low of 1.3 per cent registered last September — the largest increase in borrowing costs over a nine-month period since 2006.

Mortgage rates are rising across advanced economies as central banks supersize rate rises in a bid to control inflation, raising the risk of prices crashing. In the UK, the average rate on newly drawn mortgages has risen by 65 basis points to 2.15 per cent since the autumn of last year. In the US, the 30-year benchmark Freddie Mac mortgage rate is above 5 per cent, up from less than 3 per cent in the summer of last year.

Andrew Kenningham, chief Europe economist at Capital Economics, described the increase in the eurozone as “striking”. He added that higher borrowing costs would be an additional headwind for households, which have seen their disposable income crushed by surges in the cost of energy and food over the past year. “It is one of the factors which we think is likely to push the eurozone into recession in the coming six to nine months.”

The ECB data showed mortgage rates rose more rapidly in Germany and Italy, with smaller rises recorded for France and Spain. In Germany, the average mortgage rate rose by more than a full percentage point from the recent low of 1.16 per cent to 2.25 per cent in June. In Italy, there was a 72 basis point increase to 1.97 per cent from the recent low of 1.25 per cent.

Rates have increased across most types of product. The largest monthly rise was for mortgage rates with a maturity of between five and 10 years, which increased by 21 basis points between May and June to 2.23 per cent.

Mortgages look set to become more expensive over 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 move than expected. Another 50 basis point rise is forecast for September after inflation hit a fresh high of 8.9 per cent in the year to July — a fresh all-time high for the currency area and more than four times the central bank’s 2 per cent target.

Markets expect more monetary policy tightening in the UK and US too. They have priced in an 88 per cent probability of a 50 basis points rate increase when the Bank of England meets on Thursday, with additional increases expected at the next meetings of the US Federal Reserve.

Rising rates are expected to cool down the boom in the housing market — the result of record-low interest rates, fiscal measures to boost activity and strong demand for bigger properties with outside space because of more people working from home.

“We expect the housing market to slow meaningfully in response to the sharp rise in mortgage rates,” said Oliver Rakau, economist at Oxford Economics. “Looking ahead higher rates and tighter bank lending conditions signal that loan flows are set to slow sharply.”

Eurozone house price annual growth reached an all-time high of 9.8 per cent in the first quarter of 2022. While price growth is expected to slow in the coming quarters, economists view a crash as unlikely.