ECB Forecasts Price Falls As Rates Rise

19 Sep 2022 | Blog

The property market is moving towards a scenario with questions regarding monetary policies, which in turn has a direct impact on some of the main property indicators: the volume of closed sales transactions, mortgage contracts that are signed, or the price of both properties and mortgages.

In this context, the European Central Bank (ECB), only after a few days of raising mortgage rates yet again, published its forecasts on the evolution of house prices and property investments for the upcoming months. Thus, the international organisation predicted falls in property prices and investments in the euro area housing market due to the rise in mortgage interest rates.

As sources within the banking institution state, housing market dynamics react strongly to mortgage interest rates. A one percent point increase in interest rates leads to a 5-9% fall in house prices and an 8-15% fall when dealing with investments. 

In this sense, mortgage rates have risen sharply since the beginning of 2022 after falling to an all-time low during 2021. Growing aggregate house prices in the euro area accelerated from an annual increase of 4% at the end of 2019 to almost 10% in the first quarter of 2022, the highest rate since early 1991. 

Investment in the housing market recovered rapidly after the pandemic-related slump in 2020, reaching 6% above pre-crisis levels during the first quarter of this year,’ according to ECB economists.