Interest rates dampen demand for mortgages and now inflation could hit real estate too

Real estate

Posted by MoneyController on 23.05.2023

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Property has been seen as a value-preserving investment because of the upward trend in prices, but restrictive monetary policy is leading to a slowdown in growth and, in some cases, a decline in house prices.

Rising interest rates dampen demand for mortgages

The ECB's rise in interest rates has led to a fall in demand for mortgages; in a report on the bank lending market, the ECB itself recorded the biggest fall in demand for mortgages since 2003, the year of the first measurements. As house prices fall or stagnate - as some analysts predict - it is therefore possible that property investments will not be able to withstand the erosion in value caused by inflation.  

Property prices do not move in the same way across Europe

It has to be said that property prices do not move in the same way across Europe. In particular, according to a study by BNL/Bnp Paribas entitled "Real Estate, Between Growth and Inflation", the sharpest decline was recorded in Germany, where house prices were 5% lower in Q4 than in Q3 of the same year.

Firm prices and falling mortgage incidence

Presenting the report, Simona Costagli of Bnl Economy Research explained that the value of real estate in Q4 2022 was still higher than in 2015. According to expectations for 2023, prices are expected to remain firm. Of course, the decline in demand for mortgages is noticeable: as Costagli points out, the share of mortgages in sales fell from 51.9% to 42.8% between Q1 and Q4 2022.

Property companies can rely on rental prices and capital reserves

The European real estate market is certainly under pressure: according to the forecasts of Philipp Wass, managing director of the European rating agency Scope Ratings, as reported by the portal idealista.it, the value of European residential real estate companies will fall by 10% by the end of 2024. Nevertheless, the demand for housing remains constant and this can continue to support the growth of rental prices; in this sense, growth of between 2 and 5 per cent is expected between 2023 and 2025. In addition, as Wass explains, the good capital reserves of property companies suggest that they will be able to withstand adverse market conditions.

Read also:

Real estate crisis: not all European countries are equally at risk

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