New estimates from the European Central Bank (ECB) suggest that euro area house prices could drop as much as 9% over the next two years as mortgage rates rise. The analysis relies on recent rate increases and does not assume any further hikes. The tone is cautious, highlighting a potential real estate downturn driven by tighter borrowing conditions rather than a swift rebound in demand.
In an article from the ECB’s Economic Bulletin, researchers note a 63 basis point jump in mortgage rates in the first quarter of 2022, the largest six month rise on record. They explain that this jump would influence both housing prices and real estate investment. A linear projection from ECB technicians links a one-point rise in mortgage rates to a 5% fall in home prices and an 8% drop in real estate investment two years later.
When non-linear effects are considered to reflect higher sensitivity in a low rate environment, the impact doubles. Prices could fall 9% in two years, with investment down around 15%. Some of the decline may be offset by higher pricing and investment in larger homes located away from city centers, as households adjust to changed preferences in the wake of the pandemic.
Opinions vary widely among economists and real estate experts about the ultimate effect of rate hikes on different markets. The starting level of prices matters, and each property may react differently to the same macro conditions. The situation remains nuanced, with several paths possible depending on inflation, employment, and regional market dynamics.
moderate estimate
A recent assessment from a CaixaBank Research analyst, within the European context, suggested a more moderate path for real estate sales against a backdrop of rising prices. The slower activity would come as inflation remains high, eroding household purchasing power and prompting tighter financial conditions from central banks. The forecast calls for inflation to ease toward 2023, allowing longer-term rates to stay at relatively modest levels by historical standards. In this scenario the Euribor level could hover around 1.8% in late 2023. As a result, ongoing market harmonization could proceed with less drag on sales; prices would slow rather than crash. The projection indicates a decline in transaction numbers by roughly 2.8% in 2022 and about 10.8% in 2023, with housing prices easing from an initial 6.6% rise in 2022 to around 2.2% in 2023.
The most apocalyptic prediction
On the other side of the debate, some voices warn that rate increases could be sharper than anticipated. In the real estate sector, concern has grown about a potential oversupply crisis coupled with rising borrowing costs. A prominent executive warned that uncertainty should be priced into mortgage terms. If debt service climbs, mortgages are unlikely to fall below 5% next year, with some projections suggesting a jump from zero to as much as 2.5% within months. If mortgage rates advance to around 4.5% next year, many families could see monthly loan payments rise by roughly 200 to 300 euros, amplifying affordability pressures and dampening demand across several segments of the market. These scenarios underscore the risk that the weakest buyers could pull back quickly and that developers may face slower absorption in some regions.
Overall, the market outlook remains highly conditional. Factors such as regional pricing power, construction activity, and regulatory settings will shape outcomes in the near term. While some forecasts point to stabilization, others warn that prices could extend declines if rate trajectories surprise to the upside and if household budgets tighten further. In all cases, buyers and investors should monitor central bank communications, inflation trends, and data on mortgage availability to gauge how the housing market may evolve across North America and Europe.