House prices in Europe set to continue to fall

House prices are set to continue falling in much of Europe this year, with some of the steepest declines coming in core eurozone countries such as the Netherlands and France, according to a Standard & Poor's report.

The rating agency said the direction of the market was a result of high unemployment and low consumer confidence caused by the recession in the region – though it added that Germany and the United Kingdom would likely buck the trend.

Spain will be worst hit, with house prices tumbling 8 per cent this year and another 5 per cent in 2014 because of "a lack of solvent demand to absorb excess supply", said S&P economist Sophie Tahiri. But she warned that the fall could be even worse.

"We believe Spain's bad bank SAREB, which holds 30 per cent of the country's repossessed housing stock, will gradually disinvest it gradually over the next two or three years so as not to precipitate a market collapse," she said. "An acceleration of this disinvestment process could in our opinion push house price declines into double digits in 2013-2014."

The second steepest drop in house prices will come in the Netherlands, S&P said, putting it down to weak growth, falling purchasing power, higher unemployment and changes to regulations. It forecast declines there of 5.5 per cent this year and 1 per cent next year, with the market bottoming out in 2015.

France will experience a 4 per cent fall this year and next year, despite the market there proving "more resilient" than the rating agency expected. "Low interest rates and supportive lending policies imply a softer landing in France over the next 18 months," the report said.

Meanwhile Germany will see house prices rise 3 per cent in both this year and next year, as a result of "a better-than-European-average economic outlook, low interest rates and strong national and international demand for homes as a safe capital investment", S&P said.

However, the rating agency noted that it considered the increase in prices in Germany to be a "normalisation" because it did not experience a boom over the last 20 years, and because the market there is still undervalued by 20 per cent according to an affordability ratio of house prices to incomes.

In the UK, a more positive economic outlook and improved availability of credit meant the recover was stronger than S&P expected, according to the report. Homes are still considered to be overvalued in the UK, yet prices are expected to rise 2.5 per cent this year and 2 per cent in 2014.

In the long-term a shortage of supply matched with rising populations means the prospects for the European housing market "appear brighter", S&P said.