The Rise of Interest Rates in the US and its Impact on the European Real Estate Market
Rates US European Real Estate Market

The recent decision by the US central bank to raise interest rates to the highest level in 16 years has sent ripples through the global financial landscape. As the Federal Reserve continues its battle to stabilize prices, the real estate market is bracing for the consequences of this significant shift. 

The Rise in Interest Rates

The Federal Reserve‘s decision to increase its key interest rate by 0.25 percentage points marks its 10th hike in 14 months. With the benchmark rate now ranging between 5% and 5.25%, up from near zero in March 2022, the Fed has hinted that this may be its last increase for the time being. However, many observers anticipate that interest rates will remain higher for a longer period.

Higher interest rates translate into increased costs for homebuyers, businesses seeking expansion, and individuals carrying debt. The intention behind raising interest rates is to dampen demand and cool off escalating prices. As borrowing becomes more expensive, officials expect a decline in demand and a potential slowdown in the real estate market.

The European Perspective

The impact of rising interest rates is not limited to the US alone. The European Central Bank has also raised rates, although to a lesser extent than in previous months. The decisions made in Washington reverberate across the Atlantic, significantly affecting European countries. Borrowers, particularly those with variable-rate mortgages, are feeling the effects of the meteoric rise in interest rates.

In Europe, households in countries like Greece, Portugal, Spain, and Italy, where variable interest rates are prevalent, face higher repayments and increased living costs. In contrast, countries like France, Germany, and the Netherlands, where fixed rates are more common, are relatively spared. However, Sweden and the UK stand out as countries experiencing significant challenges in their housing markets due to rising interest rates.

The euro area housing market has experienced robust growth in recent years, supported by favorable mortgage rates. House prices have seen a significant increase, with growth rates reaching their highest level since the early 1990s. However, rising mortgage rates can have a substantial impact on house prices and housing investment, particularly in a low-interest-rate environment. Other factors, such as pandemic-induced shifts in housing preferences and structural influences, may also play a role in shaping the housing market outlook.

A Turning Point for European Housing Markets

As the cost-of-living crisis erodes real incomes and the surge in interest rates makes borrowers more vulnerable to financial distress, European housing markets find themselves at a critical turning point. The impact of these factors on the housing outlook is significant, and uncertainties remain regarding the future direction of the market.