How do interest rates affect the real estate market?

cómo afectan los tipos de interés

Interest rates are one of the elements that most affect the real estate market in different aspects. From the demand and price of mortgages, to loans to finance real estate projects, to the evolution of house and other real estate prices themselves.

A new era in interest rates

Interest rates have been going through a somewhat turbulent few years. From 2014 to 2022 they were practically stationary and anchored in the territory of 0% in the case of Europe. This eight-year period was followed by a sharp rise in inflation, reaching levels not seen since the 1980s.

It was this situation, that of rising inflation, that prompted the ECB to approve hikes that placed rates at 4.5%, the level at which they peaked. They remained there for several months, before starting to fall in June 2024. With inflation apparently under control and in line with the 2% target, a new era begins.

Now, doubts among the market consensus lie in how much further interest rates will fall. Currently, predictions put them at 1.5%-2% in twelve months’ time. But it will all depend on inflation and economic growth. In any case, a new era of normalisation is dawning.

How do interest rates affect the housing market?

The real estate market is tremendously broad and can be analysed from different prisms. Therefore, it is necessary to look at how interest rates affect different areas.

Mortgages

In 2023, according to the INE, the number of mortgages fell by 17.8% compared to 2022. So far in 2024, the fall has been 1.7% compared to the previous year. So we are at levels almost twenty points lower than in 2022, when the rate hikes began.

With these data, there seems to be a correlation between interest rates and the demand for and granting of mortgages. When they are lower, it is cheaper to finance and demand is stimulated. Whereas, when rates rise, the interest to be paid to the bank is higher, something that deters potential homebuyers.

In fact, by 2025, according to Solvia, demand could return to positive territory with moderate growth of between 2% and 3%. This view is also supported by the consultancy firm EY, which predicts growth of 2.8% in 2025 and 4.1% in 2026 in the heat of this decline in interest rates.

Developer loans

Another fundamental element in the financing of the real estate market is in developer loans. These are responsible for injecting liquidity for the development of projects and new housing. In 2023, this type of loan reached a low point in Spain. They were below 6.5% of GDP, representing 6.34%, two percentage points less than in 1998.

In 2024, at the end of July, loans to developers fell by 2.98%. For the coming year, despite the fall in interest rates and these better financing conditions, no great exposure is expected, although a slight recovery can be sensed. Above all, because new building permits are expected to grow by a further 10,000 for the coming year.

Prices

As for prices, the impact of interest rates is one more element in the equation. In the current context, in which there is a housing shortage in Spain, cheaper financing can mean, although it may sound contradictory, more expensive housing.

In fact, institutions such as BBVA forecast price growth of 5% in 2024 and 4.7% in 2025. According to Solvia, renting could even take the worst part. Rents could rise by up to 10% in the face of high demand and a shortage of supply.

New building permits

If there is an important element in the equation, it is that of new building permits, which plummeted after the 2008 crisis and have not even managed to recover the pace they had in the 90s. The shortage of supply can be justified by more than fifteen years of low building permits.

However, these are expected to grow by between 6% and 8% by the end of this year in view of the better financing conditions due to lower interest rates and growing demand. In fact, according to data from the Ministry of Housing and Urban Agenda, between January and July visas grew by 27% and in the seventh month of the year reached 12,500, a figure not seen since the end of 2008.

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