The Federal Reserve raised the key interest rate in the US to have a significant impact on the US mortgage rate. Inflation, rising rates and property prices have made it more difficult to buy housing than ever since the burst of the housing bubble. This combination of factors has resulted in a decline in sales and will soon lead to a decrease in prices.
The US is not far behind Europe in terms of what is happening. Real estate markets in certain areas have shown signs of decline since the start of the year. We’ll examine where and how it’s happening and discuss what it means.
Real estate – Presentation by country
Eurostat statistics regarding real estate sales do not cover the first quarter 2022. These statistics paint a diverse picture for every country within the European Union. Some countries are experiencing rapid growth, such as Bulgaria, Cyprus and Portugal, Slovenia, Slovenia, and others. It is also growing rapidly in some countries (eg, Bulgaria, Portugal, Slovenia, etc.), but it is falling in others (Netherlands Denmark, Finland). These are the changes in Europe’s first quarter.
Eurostat publishes only data on property sales for 18 countries. Germany and Italy are not included. They are the largest and most populous economies in Europe. The Bundesbank collects data about changes in housing purchases in Germany but not quarterly, but more frequently than quarterly. According to the most recent official information, all types of property transactions in Italy increased by 14.1% during the fourth quarter 2021.
This is not an indication of the performance for next quarter. For example, in Hungary, there was a significant increase at the close of last year which then turned into a contraction.
Why is real estate transaction falling?
When mortgage rates drop, property sales increase. Purchases fall when the interest rate goes up. This is particularly true when you consider the high prices in Europe right now. Consumers suffer from two sides when prices rise to a point where credit is more difficult. He will have to pay the higher price of the property and an ever-increasing amount on the loan. This risk increases if the loan is not paid off.
Inflation is a major factor in this situation. People will have a harder time getting a mortgage if their finances are tight and they don’t know how long the prices will rise. This makes it harder for properties to become available, just as in the US.
These data show that mortgage interest is inversely related to purchases. Mortgage rates rise in all countries that have a falling housing market. Real estate sales continue rising in countries with low mortgage rates or falling.
Romania is an apparent exception. Despite an increase in mortgage interest, there was an increase of annual transactions in the first quarter, after a decrease during the last quarter 2021. This is because the interest rate on mortgage loans in lei has been increasing. It was 4.7%. However, the interest rate for euro mortgages is still at 3%. Consumers are switching to euro home loans.
Why is it that mortgage rates are rising but not everywhere?
The policy of the European Central Bank, and the key interest rate it sets, is a major factor in the debt markets of the Eurozone. The European Central Bank also has indirect effects on capital markets in countries that are linked to the euro (eg Bulgaria). While other countries like Romania and Serbia have their own interest rate policies, those in the Euro Zone are more dependent on changes to the European Central Bank’s key interest rate.
This begs the question: Will interest rates change in general for all countries within the euro zone? If so, will consumer and mortgage rates also fall when prime rates are lower? This is not always true. Other factors, such as the prime rate, also have an impact on local capital markets. These other factors can also affect mortgage rates.
Inflation is a rising pressure on local markets.
It has recorded the highest number of years in certain countries (e.g. Romania, Bulgaria, Serbia, etc. It also reached records for a decade in other countries (e.g. Netherlands, Norway, Finland, France, etc. ).
Slowing real growth
The energy crisis and the winter outlook are particularly affecting European countries. Some countries are at very high risk.
Majority of government programs are funded by debt
In some countries, more capital is directed towards the purchase of government securities as government bond yields rise. The decrease in funds available to private projects leads to an increase of interest rates on the capital markets, and in particular, to a rise in mortgage loans. Each country has a different amount of debt, so funds are directed at it in a different way. The Dutch have seen their debt increase by nearly 25% since 2019, while that of Bulgaria has increased by 38%. In the first instance, we are talking about more than 70 billion euros (7 % of GDP) and in the second about 4.5 billion euros (5 % of GDP).
The Netherlands’ example has shown that the interest rate for ten-year mortgages has doubled since the start of the year due to the combination of all these factors, going from 1.5 to 3.4%. This is just before an increase in key interest rates at the European Central Bank. The historical record for the rate of -0.5% is still in place. It is a powerful “stimulator” of savings. This will change, however, and everyone will be affected when it grows in the near future.
The impact of Europe’s sales decline
Nearly all of Europe saw the lowest historical values. This is just days before the European Central Bank’s main interest rate increase, which is expected to occur in the next few days. This will result in an increase in interest rates within the euro zone. The crisis Europe will face sooner than expected is a crisis.
In the future, we can expect the fall in real estate sales spread to more countries. The decrease in transactions will lead to a decline in prices. Property owners will see their investment in assets decrease. If the interest rate on the mortgage loan is not fixed, however, it will be more expensive to pay.
The economy is not a machine. The prime rate rise that resulted from the housing bubble began in late 2005. About a year later, it had an impact on mortgage rates. It rose for 2 years before the housing bubble burst during the 3rd quarter 2008.
Interest rate increases don’t always occur in the same place. Although interest rates in Serbia, Romania, Bulgaria, and Romania are different, it takes some time for them to reach the periphery. It is possible to expect that real estate sales in these countries will continue to grow slightly faster than those in developed European economies.
Falling sales in Ireland, the Netherlands, Austria, Finland, and other EU countries bode well for future EU property markets. Although this will be noted with some delay, the causes of this decline will also be apparent here. This will be exacerbated by the economic environment, the recent potential crisis, the extremely high real estate prices, and the rise in the main interest rates by the European Central Bank.