According to the ECB, theincrease in mortgage rates could generate a decline in house prices.
In a study on the repercussions of the increases in mortgage rates, the ECB underlines how in the first six months of this year they increased overall by 63 basis points in the eurozone, a historic high for a six-month period. Rises that can have heavy repercussions on real estate prices and investments in the euro area sector, even if the repercussions of what happened in recent years with Covid increase uncertainty about the prospects for the home.
The jump occurred after mortgage rates fell to historic lows last year. The institution also notes that in recent years, aggregate real estate prices in the euro area have shown a strong acceleration, going from a growth rate of around 4% at the end of 2019 to almost plus 10% in the first quarter of 2022. This was the highest value since the beginning of 1991. While investments in the real estate sector have shown a rapid recovery after the collapse caused by the lockdown and restrictions imposed by governments due to Covid.
'Empirical evidence shows that real estate market dynamics are very sensitive to mortgage rates. According to one model estimate, a one percentage point increase in mortgage rates leads to a decline in securities prices of about 5% after two years. The same increase has a greater impact on real estate investments - adds the ECB - leading to a decline of 8% after two years.
And if the general context is one of low investments, the impact on both prices and investments in real estate is even greater, says the monetary institution. In short, there would seem to be all the conditions for an abrupt and bumpy landing for the house after the recent price recoveries.
But the ECB itself warns that developments on the real estate market are also influenced by other factors, including elements of a structural nature. And that these elements could increase uncertainties regarding the prospects of residential real estate. For example, after what happened with Covid now and families seem to place a greater value on spacious real estate, which allows for remote working and are also opting for homes further away from the workplace.
In addition, house prices outside eurozone capitals have increased more since the 'pandemic' occurred and the share of the population living in houses further away has increased. The preference for more spacious properties, then, could also support investments. Therefore, according to the ECB, the changes in preferences following Covid could explain part of the resilience observed in the eurozone real estate market.
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