the consequences on the housing market in Europe – idealista / news

While mortgage rates at very affordable levels in recent years have given a boost to real estate sales across Europe, the scenario is now changing. The latest ECB Bulletin contains a study, edited by Niccolò Battistini, Johannes Gareis and Moreno Rome, which analyzes the consequences of interest rate dynamics on the European residential real estate market in the Euro area. Here are the main evidences.

Mortgage rates rising as the market changes

Since the beginning of 2022 i rates applied to mortgage loans in the euro area, they have risen significantly, after hitting an all-time low in 2021. Over the past two years, the euro area residential property market has been buoyant and has been supported by favorable interest rates on mortgage loans.

There rising house prices in the area accelerated, in aggregate terms, from an annual increase of around 4 percent at the end of 2019 to nearly 10 percent in the first quarter of 2022: the highest rate since early 1991. At the time Similarly, investment in the residential construction sector recovered rapidly after the collapse associated with the pandemic in 2020 and in the first quarter of this year were around 6% above pre-crisis levels.

ECB Bulletin

ECB Bulletin

House prices fall as mortgages rise

The trend of mortgage rates has consequences on house prices. Indeed, if the composite indicator of the cost of household debt for house purchase fell to an all-time low of 1.3 per cent in September 2021 and remained substantially unchanged until December of the same year, in the first half of he rates on mortgage loans reported a significant increase (equal to 63 basis points): the largest increase in six months ever recorded.

Empirical evidence suggests that the development of the residential property market is very sensitive to mortgage rates. A method based on local linear projections is used to show how the rise in mortgage lending rates affects house prices and investments in the euro area housing sector. According to the estimated model, a increase of 1 percentage point of the rate on mortgage loans determines, all other conditions being equal, a decline in house prices of approximately 5 percent after about two years. However, the same percentage point increase in the rate applied to mortgages has a greater impact on investment in the residential construction sector, causing an 8 percent decrease after about two years.

What happens to real estate investments if mortgages increase

THE housing prices and investments in the residential construction sector they are most affected by the increase in mortgage rates in a context of low interest rates. Under the asset price theory, lower mortgage rates increase the sensitivity of house prices to changes in these rates, because when they fall, there is greater discounting effects on future rents and prices. Such increased sensitivity of house prices could, in turn, make investments in the residential construction sector more sensitive, through the profitability of residential properties and the effects on the value of collateral, as both of these factors are significant determinants of investments. and are affected by the trend in house prices.

In order to detect this non-linearity, an adjustment is made to the model to include a control indicator of the level of mortgage rates. The results of this non-linear model show that, in a context of low interest rates, the estimated decline in house prices and investment in the residential construction sector, in response to a 1 percentage point increase in mortgage lending rates, is respectively approximately 9 and 15 percent after about two years. This is about double what emerges from the linear results.

Other elements of uncertainty in the housing market in Europe

However, in addition to the mortgage rates, the performance of the residential property market is affected by other factors, including those of a structural nature. While the empirical evidence from local projections points to potentially large downward corrections for the euro area housing market, other factors, not captured by the models, should also be considered. Such factors could increase the uncertainty about the outlook for theresidential construction.

Following the COVID-19 pandemic, families now show that they attach greater importance to more spacious properties, which allow remote work, and are more interested in areas further away from their office. Preliminary evidence points to higher price increases for self-contained homes in some of the euro area countries for which data are available since the outbreak of the COVID-19 pandemic. In addition, prices in the euro area have increased the most for properties outside euro area capitals since the COVID-19 pandemic and the share of the euro area population living in self-contained homes has increased in the 2020.

There preference for larger sizes it could also support investment in the residential construction sector. The pandemic-induced shifts in residential property preferences could counter the rise in mortgage rates and partly explain the resilience observed in the euro area housing market.

Source link

About Eric Wilson

The variety offered by video games never ceases to amaze him. He loves OutRun's drifting as well as the contemplative walks of Dear Esther. Immersing himself in other worlds is an incomparable feeling for him: he understood it by playing for the first time in Shenmue.

Check Also

What is the spread and how it works: everything you need to know

The word spread is borrowed from the English language and means difference. In the specific …

Leave a Reply

Your email address will not be published.