US and European real estate markets are under pressure from inflation and rising interest rates

Prices have fallen by about 5 to 10 percent compared to last year in some regions, with Europe already following a trajectory in the United States. “I think we have some difficult months ahead of us,” Steinbach warned, quoting Bloomberg as quoted by Ziarul Financiar.

Companies are revising their expansion plans in the face of rising costs, and at the same time raising interest rates will result in higher financing costs, putting even more pressure on demand.

Properties can provide protection against inflation, but over a decade of extremely low interest rates and anemic yields in bond markets have pushed prices to record levels, making them vulnerable to rising financing costs.

A series of interest rate hikes by many of the world’s major central banks have stalled the rapid rise in global house prices, but although the rise in residential markets will moderate, experts have more reason to be relatively optimistic that future price declines will not be as dramatic as those recorded after the financial crisis of 2008-2009, writes Valentina Romei, editorialist at the Financial Times.

In the US, house prices recorded an annual growth rate of 20.6% in March, the fastest since measurements began more than 35 years ago. In the last quarter of last year, house prices in OECD countries rose by 16% in two years, the fastest pace since measurements began 50 years ago.

Rising prices have been largely driven by declining interest rates by the world’s major central banks in a bid to reduce the economic impact of the pandemic. The banks’ actions reduced the cost of mortgages at a time when many households had saved money during lockdowns. Working from home has also helped increase demand, and therefore prices.

In recent months, however, the dramatic rise in consumer prices has led many central banks to raise interest rates, and mortgage rates have begun to rise as a result.

Some signs of slowing price growth have already begun to appear. In the US, new home purchases fell 17% in April from the previous month, the most since April 2020. In the UK, mortgage approvals reached their lowest level in nearly two years in April.

New interest rate hikes by central banks are likely to push interest rates on mortgages and above. Markets expect central banks to raise interest rates by at least 100 basis points by the end of this year or early next year in the eurozone, Canada, Australia and New Zealand.

Most experts expect these interest rate hikes to slow down house prices.

The European Central Bank warned in May that a “sharp rise in interest rates” could lead to short-term “house price corrections”.

Economists point out that in addition to higher mortgage costs, factors contributing to the slowdown in house prices include eroding real inflation revenues. As a result, Oxford Economics expects house prices to rise more slowly in 2023 than last year in most countries, and some countries will see contractions.

And in the case of the largest European economy, the German economy, house price growth is expected to moderate over the next two years.

According to a Reuters survey of analysts, house prices are expected to rise by 7% this year, with the pace slowing to 3% in 2023 and 2% in 2024.

“House prices will rise more slowly, as rising interest rates, rising inflation and declining disposable incomes will reduce accessibility,” said ING’s Carsten Brzeski.

Globally, few forecasters expect a sharp decline in property prices, such as that recorded during the 2008-2008 financial crisis, writes Valentina Romei.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, says the current conditions are not the same as in 2006.

Better quality mortgages provide extra reason for optimism.

Also, historically low unemployment rates and a shortage of homes for sale support demand in most advanced economies.

Innes McFee, an economist at Oxford Economics, says that in the absence of rising unemployment that would create a large number of forced sellers, he does not expect “significant declines in house prices” in most markets.

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