A EUROPEAN COMMISSION report says that house prices are overvalued in several EU member states including Spain and predicts they will fall.
The EC notes that ‘house prices grew strongly in 2022 overall, but over the course of the year the price of real estate began to decelerate’.
“In most Member States, during the pandemic and the immediate post-pandemic period, there were sharp increases in overvalued property markets in many countries, taking advantage of years of house price growth that exceeded household incomes” the report states.
“House prices are overvalued and continue to rise in Spain where the evolution of house prices can be seen as a risk factor for a more pronounced future correction if economic conditions deteriorate,” the European Commission report warns.
The EC’s document on the real estate market says that the overvaluation of the real estate sector manifests itself when prices are significantly distanced from the projected incomes of potential buyers.
Strikingly, the report highlights the persistent increase in prices in several economies in southern, central and eastern Europe- including Spain- despite the fact that they are already overvalued.
Spain’s overvaluation is estimated at around 20%- a considerable figure, although much lower compared to the 60% recorded in Luxembourg.
Brussels warns that the upward trajectory of house prices could constitute a substantial risk factor, especially if a steeper correction materialises in the future or if economic conditions deteriorate significantly.
The EC’s detailed observation underlines the need for constant vigilance and preventive measures to mitigate potential adverse impacts on the real estate market and thus on the economic stability of these countries.
Other agencies have already warned about the risk posed by the real estate market like an International Monetary Fund report published in March.
It said: “Housing is a key sector in the economy, as it represents a significant part of household wealth and collateral held by banks. Over the past decade, and in particular since the onset of the pandemic, house prices in Europe have risen faster than fundamentals can explain, pointing to an overvaluation of around 20% in most markets in 2022, and implying a high risk of price correction.”
However, the Spanish real estate market seems resilient in the absence of imbalances like those of previous cycles.
This time there was no credit bubble accompanying the price increases. In addition, the Spanish market had already corrected very sharply between 2007 and 2014, so that it is currently starting from a lower level of overvaluation than most countries in northern and central Europe.
In the first quarter of 2023, the European Central Bank estimated the overvaluation of the Spanish real estate market at 10.3%, below the euro area average (12.8%).
The estimate of overvaluation is also significantly lower than the 19.8% in the Netherlands and 14.8% in Germany, where house prices have already corrected significantly from their peak levels.