Leaving aside the behavior of the economy during the coronavirus and its subsequent months of paralyzed activity, the trend in the housing market in the euro zone since 2013 is one of stable price growth. An environment of low rates and, therefore, low mortgage rates, has helped, in part, to sustain the rise in square meters in recent years. But the scenario outlined by the deteriorating economic situation may cause a radical change in the status quo in the short-medium term that draws a real estate market with opposite characteristics to the one that exists at the moment.
This is confirmed by the European Central Bank which, in a report published yesterday, establishes a direct relationship, for the entire euro zone, between the increase in mortgage rates and the development of both prices and real estate investment, understood not only as institutional investment, but also as purchase by individuals. In other words, the rates will have a direct influence on housing sales transactions, which in the Spanish case have reached great dynamism in the first half of the year, to such an extent that they have set a maximum in 15 years.
In addition, if the effect on prices and operations occurs in an environment like the current one, with low interest rates, with a Euribor that until a few months ago was negative, this is even greater: in this context, prices would fall 9% , while investment would yield 15%, both within two years. In the case of investment, not even Covid caused a similar drop. At the lowest point, during the summer of 2020, its drop was 14%.
Curiously, in the described scenario of low rates, the first reaction in the real estate market would be the opposite: in the case of prices, during the first three quarters after the rate hike there would be a timid rise, never above 1%. After two years, it would reach the aforementioned -9%, and would recover slightly for the third year, when it was around -5%. According to the investment in housing, the rise during the first quarters would be more noticeable, up to almost 5%. It would bottom out at -15% in the second year and, by the end of the third, it would partially recover to -7%.
“The lower the rates, the more sensitive the market is to changes in them, because low rates lead to large discount effects on prices and future rents. This greater sensitivity to housing prices may imply greater sensitivity in investment, since profitability is an important driver for it and is affected by price changes,” explains the report, carried out by three ECB analysts. Returning to the Spanish case, it is possible that in the coming months we will see an influence of the rate hike, although it already had effects even before the European Central Bank announced this rise at the end of July.
This is due to the fact that the banking entities, when setting their mortgage offers, had already been discounting this increase in the previous months, so that all rates had previously experienced a gradual increase. If the entities were already discounting this rise, the buyers were also counting on it: in the second quarter of the year, real estate sales also grew because many purchase decisions were brought forward to benefit from the best possible mortgage offer.
The report contemplates another scenario, outside the environment of low rates. Although here there would also be notable falls in both areas, it is true that they are more moderate, 5% in the case of prices and 9% for operations, both within a period of two years.
The report, however, points out that there may be aspects that act as a counterweight to the rise in rates. For example, the Covid, since this has led to a growing trend to look for another type of housing: single-family houses and larger ones to respond to the new demands of teleworking and therefore do not have to be close to the office. This is evidenced by the report, which reflects a greater interest in this type of housing that could itself act as a brake in the face of the drop that will motivate interest rates.
Another factor that will help, especially Spain, will be the confidence that exists in the real estate sector as a guaranteed investment and a refuge asset. Inflation has proven to be a more persistent problem than was initially thought, and, as the main institutions that make economic forecasts testify, it will be so at least until next year. In an inflationary context, the option of investing in housing both by institutional investors and families that still have their savings turns out to be very attractive. All in all, the European Central Bank maintains these important falls, given that the environment of low interest rates is beginning to fade after the rises of recent months.