Housing markets face rising interest rates

Housing markets face rising interest rates

Since the Covid crisis, residential real estate prices have risen significantly in most advanced economies.

Thus prices have risen by about 30% in the United States, 20% in Germany and more than 10% in France since the end of 2019. These increases reinforced the upward trend in prices that had already started several years ago (Chart 1). The recent rise in housing prices can be explained by several factors. First of all, the highly accommodative monetary policies put in place during the coronavirus crisis further exacerbated the decline in interest rates. Second, the savings accumulated by households during the pandemic have increased their purchasing power. Finally, bookings and downplaying the importance of remote work encouraged departures to second-size cities, creating a new attraction for these markets.

Over the coming quarters, the continued upward trend in interest rates should limit this upward trend in housing prices.

Many factors are currently affecting the real estate purchasing power of families. First of all, housing prices are currently high and therefore difficult for families to access. Then, inflation affects income in general in real terms and restricts purchasing power. Finally, monetary tightening is starting to affect mortgage rates (Chart 2). This combination of factors indicates that activity in the real estate markets should reduce significantly and could imply contractions in housing prices. In Europe, the deflation could remain limited as households continue to prefer real estate as an investment for their savings, in the context of a marked decline in financial markets since the beginning of the year. In the United States, the adjustment in home prices can be more pronounced due to the sharp rise in real estate prices.

The long-term, The support factors for the housing markets are still there and mean that the price adjustment must remain short-lived. In fact, different countries, notably France and the United States, are still showing a real estate supply deficit in the face of demand that will continue to be supported by their dynamic demographics. In addition, changes in environmental standards, which are particularly necessary for housing in terms of energy efficiency, will be a supportive factor for real estate investments and therefore prices in different markets – notably by subsidizing public authorities for the energy transition.

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