House prices will fall as interest rates rise — idealista/news

The European Central Bank (ECB) estimates that housing prices in the Eurozone countries as a whole, there will be a decline of up to 9% in the next two years, as a result of the rise in interest rates on mortgage loans. This is because “the real estate market dynamics is very sensitive to mortgage rates”, explain the economists who signed the article published in the most recent ‘Economic Bulletin’ of the European regulator. Only in the first quarter of 2022 was there an increase in home loan interest rates 63 basis points, which represents the largest half-year increase ever recorded.

After reaching historic lows in 2021, “the home loan rates in the Eurozone have risen significantly since the beginning of 2022”, reads the document signed by ECB economists Niccolò Battistini, Johannes Gareis and Moreno Roma. This happened due to rise of Euribor for all deadlines at the beginning of the year.

As european reference rates began to show signs of an increase soon after the ECB announced the increase in key interest rates for the first time in 11 years. And that’s exactly what happened in July: the European regulator raised interest rates by 50 basis points. About two months later, it did so again, but this time at 75 basis points, the biggest rise ever recorded. And these should not be the only ones: Christine Lagarde, President of the ECB, has already announced that she will increase principal interest three or four more times. The goal? Ensure price stability, reducing inflation in Europe from the current 9.1% to 2%.

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This ECB strategy of trying to fight the inflationary spiral by raising interest rates has been followed by several central banks. This same Tuesday, Sweden’s central bank, Riksbank, announced its biggest interest rate hike in three decades, in a week when central banks around the world are expected to take similar measures, according to the Financial Times. limited to subscribers).

The US Federal Reserve (Fed), Swiss National Bank, Bank of England and Norges Bank (Norway) are now expected to follow suit over the next two days, with increases of 0.5 to 0.75 percentage points.

How will house prices react to the increase in interest rates on home loans?

“The dynamics of real estate market is very sensitive to housing loan rates”, conclude the experts. This means that the rise in interest rates in home loans will have an effect on both house prices and real estate investment. According to a linear projection prepared by ECB technicians, an increase of one percentage point in mortgage rates causes a 5% drop in housing prices after two years, as well as an 8% drop in real estate investment.

Falling house prices / ECB

Falling house prices / BCE

The context in which you live has its particularities. At home loan interest rates were at historically low levels in 2021 – of note that the Euribor been negative for more than five years. And now they are growing at full speed riding the Euribor. This scenario, in particular, could have a greater impact on the residential market. According to economists, “the impact of rising interest rates on house prices and housing investment is greater in a low interest rate environment”, this is because “lower mortgage interest rates lead to greater discounting effects on future rents and prices”.

In a non-linear projection that takes into account a greater price sensitivity due to the low interest rates, the impact of raising interest rates by 1 percentage point doubles. That is, in an environment of low interest rates, the estimated drop in house prices It’s from housing investment in response to a 1 percentage point mortgage rate increase is about 9% and 15%, respectively, after about two years.

House price drop

House price drop


Changing home preferences helps explain housing market resilience

Considering that the rise in interest rates has an impact both on house prices either not residential investment, ECB experts highlight, however, that “the way in which the real estate market evolves is affected by other factors – including those of a structural nature – in addition to the interest on housing loans”.

Among these factors, economists point to the changes that emerged during the pandemic and that led families to value certain characteristics of houses as:

And, in this sense, they admit that the changes induced during the pandemic in housing preferences can somehow “counteract” the effects of the interest rate hike and, thus, help to explain “part of the resilience observed in the Eurozone real estate market”.

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*News updated at 10:20 on September 20, 2022 with additional information and graphics.