Euribor will be above 3% by 2025 - and house prices will fall

Instability continues to hang over the property market. But some are taking the risk of making their predictions for the future. Bankinter assumes that the 12-month Euribor will remain high and above 3% for at least three years. It also predicts that there will be a moderate correction in house prices in Portugal, as well as in other countries.

The housing market forecasts appear in Bankinter's report on investment strategies for the third quarter of 2023. In the document, analysts anticipate that the annual average 12-month Euribor will evolve as follows:

• 4.1% in 2023;
• 3.7% in 2024
• 3.2% in 2025;

These estimates are well above the annual average of the 12-month Euribor, which is now at 3.687%, as well as the historical average which is below 2%.

Other specialists' forecasts are less encouraging. Spain's Fundação das Caixas Económicas (Funcas) puts the annual average of the 12-month Euribor at 4.25% in 2023 and 4% in 2024. And BBVA Research believes it could reach 4.5% in the coming months.

It should be noted that the 12-month Euribor - the reference index for about 41% of mortgage loans in Portugal in March 2023 - closed June with a monthly average of more than 4%, the highest in the last 15 years. And further increases are expected in the short term, triggered by future rises in key interest rates already announced by the European Central Bank (ECB).

The Governor of the Bank of Portugal (BoP) has already warned that Euribor rates will continue to rise until September (12 months) and November (3 and 6 months). Only from then on should these rates start to fall slowly.

In the case of 3-month Euribor - the least used in Portugal, but which has gained weight in recent months - Bankinter predicts that the annual average will be 3.7% in 2023, 3.2% in 2024 and 2.7% in 2025.

House prices should be corrected in Portugal - but only slightly

This whole scenario of rising interest rates on home loans, high inflation and loss of purchasing power is influencing the (home) purchase decisions of families, which ultimately affects the dynamics of real estate business. On this point, Bankinter believes that there will be a moderate correction in house prices until 2025 in Portugal, Spain and the USA.

In Portugal, the prices of houses for sale should decelerate in 2023, increasing much less (1.6%) than in the previous year (12.5%). And for 2024 and 2025 a slight decrease in prices of around 2% is expected. All in all, this will give a drop in house prices of 4% by 2025.

In Spain, Bankinter predicts that house prices will enter an adjustment phase in 2023 (-3.2%), a trend that will attenuate in the two following years (-2.0% in 2024 and -1.0% in 2025). In the case of other European countries, such as Ireland, house prices should stabilise this year and increase again in the following years.

In these markets, the adjustment in house prices to buy is mainly driven by:

• the rising cost of housing finance;;
•  the lower household savings rate
• the loss of attractiveness of investment in rental housing.

Also on the other side of the Atlantic, a "change of clique" is foreseen in the real estate market, after having experienced a "golden moment". Therefore, Bankinter predicts that in the US "the downward trend [in house prices] will continue in the coming months and, we estimate that the housing market may reach a drop of more than 5% by mid-year, due to the tightening of financing conditions and, consequently, the lower affordability of housing. The cooling of the housing market has negative implications for consumption and investment, and favours a more moderate tone from the Federal Reserve (Fed)", conclude the analysts.