Moody’s: Demand for social housing and rental market regulation will increase

Moody's: Demand for social housing and rental market regulation will increase

The economic downturn stemming from the coronavirus pandemic will depress European house prices and worsen housing affordability for young and low-income groups, according to a new report by Moody’s Investor’s Service.

The report found that COVID-19 speed up fundamental shifts in the European housing market, with affordability to decline despite falling house prices, greater demand for social housing and rental market regulation, alongside a shift in housing preferences away from urban areas to smaller cities and suburbs.

Moody’s expected the demand for social housing will increase, given rising unemployment and income losses amid the economic downturn.

However, it has also predicted that rental market regulation will also increase to protect vulnerable tenants. This will lead to an increase in arrears for housing associations and local governments in the short-term and constraints in respect of government funding in the medium-term.

While European house prices have remained stable in 2020, Moody’s expects prices to decline in most countries in the aftermath of COVID-19, given the severe economic downturn triggered by the pandemic. Declining house prices will be credit negative for nonperforming loan (NPL) securitisations and European banks will face higher credit costs because of increasing NPLs, but robust capital reserves will mitigate this risk.

However, Moody’s expects no credit impact for housing companies operating in highly regulated rental markets like Germany.

The report has also found that whilst house prices will decline, housing affordability will worsen for many prospective buyers post COVID-19, because of reduced earnings and access to finance. Moody’s has also said that debt availability will be limited because of stricter underwriting and this will affect young and low-income groups in particular, exacerbating wealth inequalities.

Moody’s has added, however, that cities will nonetheless remain attractive. The growing prevalence of remote working and the decrease in affordability because of COVID-19 will accelerate the shift in demand for housing away from urban areas towards smaller cities and suburbs.

The report also predicted that house prices in big cities will recover more slowly than other parts of each country, in contrast to what happened after the global financial crisis.

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