European residential construction has struggled since mid-2022, as rapid interest rate hikes caused a sharp drop in investment. Rising borrowing costs and declining loan volumes led to major contraction through 2023. However, recent interest rate cuts in 2024 hint at stabilization, with growth expected to return by 2025 as lending rebounds and housing markets recover.
The extremely rapid tightening of monetary policy from the summer of 2022 has put massive pressure on European residential construction. The effect of monetary policy on residential construction investment is very direct due to the traditionally high proportion of debt financing when buying a home, and the decline in residential construction investment is certainly intended to dampen inflation. Accordingly, the majority of eurozone countries recorded sharp declines in construction investment in 2023, with the effects being particularly noticeable in Continental and Northern Europe.
Conversely, the looming turnaround in interest rates, which now took place in June 2024, gives rise to the expectation that European residential construction is also on the verge of a trend reversal back into the growth zone. Particularly relevant in this context are the developments in new lending, which is an important indicator of housing demand and has also reacted particularly quickly to changes in the interest rate landscape in the past.
“Visible rebound in loans for house purchase across Europe “
The volumes of new loans to private households for house purchases shown in Figure 1 provide an insight into the development of loan demand since 2020. The strong expansion of loan volumes up to mid-2022 is particularly visible. Despite the coronavirus pandemic, there was a significant increase in loan volumes in many European countries. Even more significant, however, is the tightening of monetary policy that began in May 2022, which has led to a slump in new lending in most countries. Depending on the country, there were declines of over 50% in some cases compared to the peak in mid-2022.
However, with the decline in inflation and the prospect of falling interest rates, there has been a gradual recovery in loans to households for house purchase granted since the end of 2023. While credit levels remain below their peak, the rate of decline has slowed considerably, and reversed in most countries. By early 2024, household credit for home purchases in several countries began to increase once again. This likely reflects a new adjustment period as housing markets start to recover from the interest rate hikes, and credit demand slowly rebounds. The data suggests that after a period of sharp contraction following the rate increases, household credit levels across most countries are on a path of recovery in 2024, pointing to a reversal of the previous downward trend.
However, the visible stabilization in the credit volume does not mean that residential construction investments will increase again this year. Although the situation in the European construction industry has not deteriorated any further since the beginning of 2024 – the EU Commission’s economic surveys show a relatively stable picture – significant year-on-year declines are still expected. However, increased activity in the residential property market, as indicated by the upturn in loans for house purchase, is likely to lift incentives for new residential investment from 2025 onwards.
