Too early to call end of Europe’s housing boom

Investors should not confuse house-price corrections in Norway, Sweden and Switzerland with property bubbles bursting. They were caused by a building surge. Speculative construction is not widespread, and demographics still outweigh risks of over-supply.

“Cities are encountering a number of obstacles that hinder their flexibility to expand apartment construction, which in turn constricts over-supply. In particular, a lack of buildable land, regulatory obstacles, steeply increasing land prices and construction costs, as well as lengthy approval times are making it difficult to react quickly on the supply side,” said Manfred Binsfeld, a director at Scope Investor Services and author of a report out today.

Over the past 10 years, real growth in residential property prices in Sweden, Austria, Switzerland, Norway and Germany have ranged from 20% to above 50%, thanks to a combination of unprecedented financing conditions, dynamic population and economic growth and relatively low construction activity.

Residential construction in many European countries has also been increasing for the first time in years and has led to price corrections in Sweden, Norway and Switzerland. In Sweden, construction of new apartments is well above the long-term average; levels are also above average in Switzerland, Norway, Denmark, Finland and Austria.

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In the last five years, the greater Stockholm area has exhibited a dynamic increase in apartment construction. In both 2015 and 2016, 13,000-15,000 apartments were built against only 8,000 entering the market on average each year in the last 10 years. Zurich also saw a marked increase – 13,000 new apartments between 2012-2016 compared with 8,400 units between 2007-2011.

But residential construction still lags demographic factors in most of the major cities considered in a Scope report out today. Munich, for example, experienced a significant imbalance: between 2010 and 2017: 55,000 new apartments came onto the market while the number of new households topped 115,000. The story is similar in Stockholm and Oslo.

The current price corrections after years of real price growth are not unusual. Robust economic and demographic conditions will ensure that residential property prices in Oslo and Stockholm will continue to stabilise this year and increase moderately again from 2019. The same applies for apartments in Zurich.

“A decline in residential property prices that threatens the economy and financial system is possible in the event of a severe recession or a massive, sudden rise in interest rates. Both scenarios are unlikely,” said Binsfeld.

The full report can be found here

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