Rising rates could put a strain on the euro area real estate market. At least that’s what the European Central Bank (ECB) predicts in its financial stability review. The central bank fears the bursting of the real estate bubble, fueled for a long time by a policy of zero interest rates, if interest rates on real estate loans rise faster than inflation. Which is far from the case.
Real estate prices in the euro area have risen sharply in recent years, and this growth has accelerated during the health crisis, especially in some European countries. According to the ECB, real estate prices are overvalued by an average of 10 to 15%, a premium that can reach up to 60% in some countries. It is in the Netherlands and Greece that we see the highest ratio of real estate debt to GDP.
Prices fall with each rate increase
However, the central bank is beginning to prepare people’s minds for the programmed end of free (or almost) money. It even plans to raise its key rates, currently negative, from July, for the first time in ten years, or even in September. According to his calculations, real estate prices could fall by 0.83 to 1.17% after each inflation, after each increase in mortgage rates by ten basis points.
“A sudden rise in real interest rates could lead to a short-term correction in property prices, with the current low level of interest rates increasing the likelihood of a sharp turnaround in property prices.” summarizes the ECB. The risk is all the greater because the financial institution does not exclude “New corrections in financial markets” after the war in Ukraine a more pronounced slowdown in global growth resp “The need for a faster-than-expected monetary policy adjustment”.
Resistance in France
In France, the real estate market is showing some signs of slowing down, especially in the new home market. On the other hand, growth in interest rates on loans remains measured. According to the latest data from the Banque de France, rates charged averaged 1.17% in April, compared with 1.1% in December 2021. The Crédit Logement / CSA observes a significant acceleration in March and April for all categories of borrowers. and the duration of the loans.
However, borrowers benefit from a fixed rate policy on housing loans in France, which avoids abrupt adjustments, as in the United States, where the housing loan rate now exceeds 5%. The increase is also “capped” by the rate of wear and tear (currently 2.4%, including insurance costs), at least until next October. However, a larger rate hike is expected early next year, when this rate of decline will be significantly revised upwards. So far, property prices are generally resilient, with the exception of Paris, where prices are starting to fall.