According to the EU, the price of housing is overvalued by 20% in Spain, and we can be thankful.

Is the housing price overvalued in Europe? The technical services of the European Commission have just provided the answer in their recent report, and it’s clear: yes, it is. This applies not only to Spain but to two-thirds of the countries in the European Union, where prices don’t align with income levels.

However, there are important nuances. While in nations where the real estate market is more inflated, such as Luxembourg, the Czech Republic, the Netherlands, and Sweden, prices are beginning to decline, in Spain or Greece, where overvaluation is lower, they continue to rise. This explains why Brussels considers them among the territories with the highest risk. In Denmark, Germany, and Slovakia, prices are also dropping, although the overvaluation is “less significant,” according to the Commission, and has nearly been corrected entirely in Denmark.

Brussels defines the real estate market as overvalued when prices diverge from potential buyers’ incomes. It’s striking that, despite being already overvalued, prices continue to rise in Bulgaria, Spain, Latvia, Portugal, and Slovenia. In Spain’s specific case, overvaluation stands at around 20%, far from Luxembourg’s 60%. Brussels warns that the price evolution in these countries could pose a risk if there’s a more pronounced correction in the future or if economic conditions worsen.

According to the European Commission, in the eurozone, housing prices grew on average by 9% last year, a slight slowdown mainly due to inflation. By the end of last year, prices were overvalued in three-quarters of the EU countries, and in more than half, overvaluation ranged from 10% to 60% concerning available incomes.

Starting in 2023, alongside the increase in interest rates by the European Central Bank, which has made housing more expensive and impacted families’ disposable income, prices have decreased in a quarter of the European Union. Interestingly, these were also the countries where housing was most overvalued.

The future of housing prices will depend on the evolution of interest rates and, consequently, on households’ borrowing capacity, which decreased in most countries in 2022 (and likely continued this year). In some cases, the impact of interest rates reduced households’ borrowing capacity by 30% to 50%.

Commission technicians conclude that in countries with longer loan maturities and more overvalued housing, the increase in interest rates had a faster and stronger impact on prices.

The Commission anticipates a new downward correction in housing prices, especially in countries where increases were linked to periods of ultra-low interest rates. They warn that structural factors that caused continuous price increases, such as supply restrictions, remain present and could worsen due to increases in housing production costs, thereby affecting the construction sector.

Despite the 2008 real estate bubble, risks are considered to have diminished, partly because construction has less weight in the economy and due to macroprudential measures that compel central banks to intervene in relevant imbalances. However, risks persist related to households’ ability to repay loans, affecting consumption.

Brussels believes that, despite the current slowdown in real estate markets, there are still risks associated with price increases, especially because, despite the nominal interest rate hikes, real rates, more representative by eliminating the inflation effect, remain negative in some countries. This encourages greater demand for housing as an investment once short-term market concerns vanish.

In summary, a complex situation is foreseen in the European real estate landscape, with latent risks that could impact the economy and the financial stability of households in various EU countries.