House of cards? Perspectives on European housing; And ESG- from confusion to action; plus Latam country risk updates

Examples of growing social challenges are manifold, among them the shrinking home affordability across many European economies, with property prices having increased by more than 50% in real terms since 2015; our European residential real estate outlook and why policy interventions should be clearly geared towards social and green aspects. Moreover, our analysis on the implications of the new Corporate Sustainability Reporting Directive, especially when it comes to the social and governance aspects of ESG. Plus: our latest op-ed for the Global Infrastructure Hub on how better banking regulation can enhance infrastructure’s role in the green transition of economies and some updated country risk reports for the LatAm region.

House of cards? Perspectives on European housing

You’ll find the complete report here.

Tightening financing conditions, slowing growth and soaring inflation are putting pressure on the European housing market. Swiftly rising mortgage rates have dramatically reduced home affordability at a time when home prices have already reached unsustainable levels in many European countries. With higher energy prices and inflation further eroding disposable income, credit demand for home purchases is bound to subside over the next quarters.

Germany’s housing market is most at risk among the major European economies. Property prices increased by more than 50% in real terms since 2015 while home affordability has dropped by -30%. We project a price correction of -8% in real terms until end-2024, followed by around -5% in France and the UK. Price corrections in Spain and Italy, whose housing markets did not really take off after the 2000s’ bubble burst, will be less severe at around -3%.

However, the slump in house prices will not materially mitigate the growing social challenge of rapidly declining home affordability, especially for the younger generation. The massive expansion of money supply since the mid-2010s due to quantitative easing inflated prices of non-productive investment in areas that are highly collateralized, such as real estate. Thus, home affordability for younger generations and vulnerable households will become an increasingly pressing public policy issue.

At the same time, soaring energy prices, higher construction costs and rising interest rates could also challenge the European “renovation wave”.

Unlike after the 2008 financial crisis, to address this, policy interventions need to be geared towards social and green aspects. We find that a combination of increasing the supply of housing and scaling up public support for vulnerable households could strengthen households’ incentives to invest in energy-efficiency measures, advancing one of the key goals of the EU Green Deal.

ESG – from confusion to action

Our full report can be found here.

ESG is the trend in investing as an ever-increasing portion of portfolios from individual savers to large institutions is directed towards sustainable strategies. It is poised to become the key market driver over the next few years, with ESG assets set to grow by almost +13% p.a. until 2026, reaching USD34trn, compared to total market growth of only +4.3%.

However, the ESG boom has sparked some severe criticism over potential conflicts of interest, financial performance and above all measurability, given the limited amount of available data. While the first two points seem to be overblown – solving trade-offs is the essence of management, and non-financial factors become financially material in the long-run – the problem of information availability is a valid one. But the situation is bound to improve significantly, not least given the flurry of new disclosure requirements.

While it is increasingly possible to evaluate the progress in the “E” in ESG, the situation is more challenging for the “S” and the “G”, as required by the new Corporate Sustainability Reporting Directive (CSRD). Evaluating impact requires not only knowledge of the current state but also the necessary social transition pathways that are in compliance with societal goals. We introduce a new approach for addressing this challenge by using the United Nations Sustainable Development Goals (SDGs). Evolving from the limited focus on the climate transition to the inclusion of transition goals for all 17 SDGs ultimately provides the full ESG picture, paving the way for a just transition.

Updated Country & Sector risk reports

We’ve recently updated our assessment for a number of countries in Latin America:

Guatemala: Rated B2 (medium risk for enterprises), with solid growth, but remaining structural challenges.

Paraguay: Rated B2 (medium risk) as the growth track clearly lies ahead.