Spotlight on Europe: cheap money and market growth
A more robust economy and falling unemployment in the European Union, along with cheap mortgages has increased demand for property, leading to price overall growth. However, the European Central Bank’s stimulus package has failed to sustainably strengthen the currency zone’s economy.
Growth on peripheral markets
Central Europe real estate markets are on the rise. The prices of property for sale in Hungary grew by 7.4% while Slovenian residential gained 3.7% and 2.6% in Czech Republic. Demand has been stimulated by cheap loans and lower prices than leading markets in Western Europe.
+7.4% in Hungary
property price growth in H1 2015
€80 million in Czech Republic
cost of Chinese greenfield spa project
-1% in Italy
real estate prices fall
Chinese investors branching away from leading markets flashed their capital in the southern Czech region of Moravia. In November they signed an €80 million deal to build one of Europe’s largest greenfield spa projects with 14 buildings spread over 200ha that should create 500 jobs.
During the same month, other yuan investors were investigating the potential of Grandhotel Pupp in the elite spa town of Karlovy Vary, once a hotspot for wealthy Russian tourists.
Bulgaria’s resort market has also started to sort itself out and by July 2015 average property prices gained 2.8%
But there are still some grey clouds on the horizon of resort property markets. Italian property prices lost 1.0% since the beginning of 2015 and Greek real estate is still considered a risk due to the ongoing economic and political crisis.
Inflation keeps money cheap
Growing property prices are not enough to satisfy the European Central Bank, which is fighting to get core inflation back on the rails. The ECB announced in December that it would drop the deposit interest rate to –0.3% (from –0.2%) in an attempt to force banks into lending instead of stockpiling cash. The monthly €60 billion stimulus package and its quantative easing programme have both been extended until March 2017.
Key ECB decisions
03 December 2015
–0.3% new deposit interest rate
€60 bln per month on stimulus package until 03.2017
0.05% refinancing rate unchanged
Just a few after the ECB announcement. America’s Federal Reserve took the plunge and raised the interest rate, while the Bank of England should follow suit towards the end of 2016 if it too manages to stabilise inflation. Currently the ECB refinancing rate is 0.05% compared to 0.5% in the U.S., a historical low. Average mortgage rates in autumn 2015 ran at 2.25% in Europe.
During the first half of 2015, average property price growth was 1.3% in the Eurozone and 1.8% across the European Union, according to Eurostat, confirming that regional real estate markets are on the road to recovery , even though growth is uneven.
What next for the real estate industry?
Real estate markets are hinting at a bright future, but this recovery is fragile. Future growth is dependent on how economic indicators such as employment and GDP evolve in the Eurozone and the USA. The main cause for concern is governments' ability to get inflation back up to 2%, on which rising interest rates now hinge. In the meantime, foreign investments should continue to target commercial property investments, safeguarding their capital against economic and political risks at home.