What the stress tests reveal about Europe’s housing and real estate markets
The European Banking Authority, the body formed by the European Central Bank to help keep the banking system stable after the housing market upheaval, released a new round of stress tests. These tests assess how eurozone banks would weather an unfavorable and unpredictable macroeconomic landscape.
The assessments confirm that the post pandemic period was crucial for banks as unexpected events can impact income statements. The year 2021 marked a transition as economies began to recover. Yet 2022 presented a tougher backdrop. A new war emerged, supply chains faced strains, inflation rose, and central banks moved to counter these pressures. The key step was to raise interest rates after years at near zero. The tests gauge resilience but acknowledge the likely impact on growth across countries, a point emphasized by Julián Salcedo, president of the Real Estate Economists Forum at the Madrid College of Economists, who described the testing context.
In the worst case scenario of the tests, the European Banking Authority asks Spanish banks to consider what would happen if gross domestic product contracted over the next three years, 2023 through 2025, by 5.4 percent, unemployment climbed to 18.5 percent, and inflation remained high at 9.6 percent. Salcedo notes that while the Spain scenario is less negative than for many peers in the European Union, the overall outlook remains cautious.
What about the housing market?
Inspectors evaluate residential real estate prices alongside commercial real estate values, including office spaces, shopping centers, and logistics warehouses. In the most favorable housing scenario, prices are expected to rise modestly: 2.7 percent in 2023, 1.2 percent in 2024, and 1.0 percent in 2025. These gains are small compared with the long-term historical increases around 7.3 percent. Real terms, however, will still reflect inflation, with 2023 projecting a 4.9 percent rate. The implication is that price growth may slow relative to inflation, keeping real gains limited.
The outlook for transactions remains crucial. In 2022 roughly 720 thousand homes were sold, the strongest figure since 2008. For 2023 and 2024, the number of transactions is expected to fall by at least 20 percent, underscoring a softer market even if prices hold up. In a more negative scenario, housing prices could fall 6.5 percent in 2023, 12.8 percent in 2024, and 1.2 percent in 2025, signaling a significant deterioration for Spain and potentially wider global repercussions.
How might other real estate assets perform?
Across offices, retail spaces, and logistics properties, the broad category of commercial real estate could grow between 1.3 and 1.4 percent over the next three years in a positive environment. Yet some analysts warn that even a modest 1 percent price rise would not keep real prices from declining when inflation runs high. Julián Salcedo highlights that the real value of assets could still fall despite slight nominal gains.
In a more negative view, prices could fall by 14.3 percent this year, followed by a 10 percent drop next year and a further 3.7 percent in 2025. Meanwhile, corporate investment activity may shrink by 30 to 50 percent this year, reflecting tighter markets and higher borrowing costs.
Spain versus Europe
Across all asset types and scenarios, Spain shows relative resilience with smaller declines or larger gains compared with the broader European Union. The weakest housing performers among major EU economies include Sweden, Bulgaria, Denmark, the Netherlands, and Poland. These markets could experience modest declines if the economy improves, or double-digit gains if conditions worsen. Hungary presents a striking case of volatility, where strong performance is possible with favorable conditions but the most pronounced declines could occur if shocks persist. This reflects a broader sensitivity to global market dynamics and policy shifts.
Generally, the outlook for other international real estate assets remains stable at nominal rates when the economy and inflation cooperate. However, downside pressures are expected if inflation persists or country growth slows, underscoring a balanced narrative of resilience and risk across the region.