House prices have risen extremely sharply in the euro zone in recent quarters. Although the trend is long overdue, demand gained traction after the covid crisis, with prices advancing at year-on-year rates not seen since the early 1990s. This demand for housing has been supported, among other factors, by interest rates that have remained low for years. Now the situation is drastically reversing.
The European Central Bank returned rates to positive ground in a single move in July, while in September it carried out the largest rise in its history. This is leading to more expensive mortgages, which has historically been the prelude to a correction in house prices.
Also of interest:
a new phase
House prices have increased a lot in recent years. The European Commission calculates that the increase in home purchases has been, on average, 45% since 2010. These prices are higher in 24 of the 27 countries that make up the EU (less Greece, Italy and Cyprus). According to the International Monetary Fund’s Housing Price Index, with data from 60 countries, in 75% of these prices have risen since 2020. But these data are about to come into a new phase.
According to ECB estimates, house prices in the eurozone as a whole will register a decrease of up to 9% in the next two years. This has been reflected in an article published in its ‘Economic Bulletin’ in which several economists from the institution have explained that, in the first quarter of 2022, there has been an increase in mortgage interest rates of 63 basic points . In other words, it is the largest six-monthly increase ever recorded.
This document reflects that the increase in the Euribor will deflate the price of housing between 5% and 9% for each percentage point that the interest on mortgages increases. The drop in investment in the sector, which has reached record highs in recent years, will be even greater and could reach up to 15%, according to the same report. The central bank believes that the impact of rising mortgage rates on house prices and investment is greater in a low rate environment.
But part of the decrease could be offset by an increase in costs and investment in larger residences further away from the nerve centers of cities in accordance with the new interests of families looking for homes after Covid-19.
Situation in Spain
Housing prices are rising strongly in Spain, where increases of close to 8% are recorded according to the INE. But in Europe the situation is even more distressing, since countries such as the Czech Republic, Estonia and Hungary are close to a 20% increase, according to Eurostat figures.
Taking into account everything described so far, based on the historical series of the Euribor and the trading, the correlation between both data is very modest. Therefore, it is complex to be able to affirm with certainty that a rise in interest rates causes a drop in short-term or long-term sales or vice versa. We’ll have to wait a few more months to see what happens.
The other side of the coin