S&P Global Ratings has released a new report on the European housing market, forecasting that, despite higher mortgage rates, the European property market is ‘likely to sag but not shake at its foundations’.

The economy is weathering external shocks better than expected, especially to the labour market, and inflation has not peaked yet, but it is close to the peak, according to the report.
S&P says that because inflation has still not peaked yet, ‘it is not surprising that central banks in Europe have not laid down their weapons. While several of them - the Swiss National Bank (SNB), the European Central Bank (ECB), and the Bank of England (BoE) - have slowed down rate hikes, proceeding with steps of 50 basis points (bps) rather than 75 bps at previous meetings, they all signal more rate hikes to come this year.’

The report continues: ‘We now expect the ECB to raise rates until the deposit rate reaches 3%, up from 2.25% in our previous assessment. Higher ECB rates will have implications for other central banks in Europe, such as the SNB. The BoE will likely raise the bank rate to 4.0% before it pauses, despite the recession; this is higher than we were expecting before. What’s more, even if inflation is likely to recede in the second quarter of 2023, as pressures from energy costs fade, it will unlikely recede back on target before mid-year 2024. Further pass-throughs from the commodities price shock are possible, especially to services and because labour costs are on the rise. Some central banks, like the ECB, believe that inflation is even going to be stickier, not reaching target before second-half 2025. This means that policy rate cuts are unlikely before late 2024.’

According to S&P, central banks have started working passively or actively on the size of their balance sheets. The ECB will start withdrawing liquidity from the bond market as early as March 2023, by not reinvesting €15bn per month of maturing bonds from its Asset Purchase Program (APP) portfolio.