Analysts at Barclays believe that the European homebuilding market is headed for a "Soft landing, not a crash."
In a note to clients on the sector, they concluded: "We expect a muted year ahead for European homebuilders, as increasing mortgage rates and weak consumer sentiment weigh on (new) home sales.
"Adding to the possibility of negative house price growth, we see more downside risks in the short to medium term, but expect long-term positive trends to provide some level of support."
The comments came as the bank's analysts initiated coverage on European Homebuilding with a 'Negative' industry view in a report delving further into the prospects for the sector with a focus on France, Germany, Ireland and Spain.
The Barclays analysts noted that European homebuilders have been under pressure since the start of the coronavirus pandemic as lockdowns have impacted revenue recognition through extended construction periods, and surging inflation in construction costs has forced companies to be more cautious and inventive in how they secure raw materials.
However, they added, profit margins have been relatively insulated, so far, given the continued increase in house prices (HPI).
The analysts said: "We believe house price increases could be a less reliable metric to maintain profit margins going forward: 1) mortgage production growth, correlated with house price growth, is declining and the latest ECB lending survey indicates banks are increasingly reluctant to approve mortgages; 2) European households, whose confidence is at an all-time low, are also holding back on new home purchases; 3) institutional investors, who have been large buyers of new homes in the private rented sector (PRS), are in wait-and-see mode; they are also facing higher financing rates, in addition to all-time low residential yields."
But, they added: "We do not see a hard landing scenario for the sector to the same extent as during the last cycle. European households are generally less indebted, as credit standards have improved. Bloomberg consensus still forecasts a resilient outlook for unemployment rates which, should it materialise, could be helpful for the sector."
"We also see supportive long-term trends: Europe is structurally under-supplied in homes as new construction has not kept up with demographic trends, i.e. we see no oversupply risk; the listed European homebuilders we have initiated on have little to no unsold finished housing units in their inventories," the Barclays analysts concluded.