Most of Europe Is Overvalued, But London Real Estate Is 50% Overvalued: S&P

Most of Europe’s real estate is overvalued, but London pushes a new extreme, says a global ratings giant. S&P Global Ratings released their annual valuation of European real estate this week. The report shows most of the continent’s housing markets are looking a little pricey. They primarily focused on the national level, but one city got a special shoutout. S&P warned institutions that London residential real estate is 50% overvalued.  

London Real Estate Is 50% Overvalued

London real estate might be a global city, but even with that reputation it’s overpriced. According to S&P, London home prices are 50% overvalued, as is housing in South-East England. The remainder of the UK is 20% overvalued, which technically is a crash if it were to suddenly fall to fair value. The steep overvaluation almost seems like a deal in comparison to London.

The report is primarily at the national level, but London received special attention. This is most likely due to the size of the city, being the largest market in the former EU. However, the UK isn’t the only country facing housing bubble risks. “Most European countries’ housing markets’ are overvalued relative to their long-term affordability,” says Alastair Bigley, the analyst who oversaw the report.

European Real Estate Valuation Ranges By Country

The over/undervaluation of European real estate in March 2022.

Source: S&P Global Ratings.

Most of Europe’s Housing Is Now Overvalued Due To Similar Policies

European home values are stretched across most countries, since they adopt similar policies. Markets with the largest overvaluation include Austria (39.5%), Sweden (32.2%), and the Netherlands (25.0%). An overvalued market is one where there is no fundamental support for a price increase.

Europe Home Price Valuation Estimates

The estimated over/undervaluation of home prices across Europe.

Source: S&P Global.

“During the pandemic, buoyed by the low-rate environment, purchase tax cuts, and purchasers flush with excess savings, some countries–notably, the U.K., Sweden, Austria, and Netherlands–saw significant house price appreciation that did not correlate to wage growth,” Bigley explains.

S&P routinely conducts annual housing valuation studies for their credit analysis. These are typically used when evaluating mortgage pools backing RMBC or covered bonds. Over/under valuation is then used to help conduct stress testing scenarios. The warning isn’t for homeowners, but a warning to institutions about lending to them. During the pandemic, these studies were paused but they’re now back.