The Impact of Rising Interest Rates on the Real Estate Market

The European Central Bank, ECBraise interest rates by 25 basis points, up to 4.25%, which is now at levels it has not seen since 2000. In addition, inflation is also high and this affects, to a greater or lesser extent, the real estate sector, right? which way?

This frame, Fernando Tisner, City Manager of Madrid de Casavo, explains that the last quarter of the year has historically been a good time to carry out a sale. And this, despite the rise in interest rates from the European Central Bank, “we see no reason for this year to be different.”

For the expert, “this increase in rates does not mean that we are facing a setback in the real estate market, but rather its normalization after a record 2022. Likewise, we are still very far from the levels of interest that we saw almost a decade ago and we come from a time when these were very low”.

For his part, Jesús Duque, vice president of Alfa Inmobiliariabelieves that this increase in interest rates is leading to a significant rise in mortgage prices, a key factor in discouraging many potential buyers and reducing market demand.

“Demand for housing continues to moderate, albeit gradually, as reflected in accumulated sales during the first five months of the year, which fell by 12.5% ​​year-on-year. Despite this, they remain 9% above the levels of 2019, according to data from Notaries”, he explains. Cristina Arias, director of the Tinsa Studies Service. “The increase in interest rates affects more strongly the granting of mortgages, which are reduced more than sales as a whole.”

Mortgaged, those who will suffer the most from this rise

As the experts point out, it is in mortgages where this price increase can be seen the greatest. Idealist expresses that the Euribor will move above 4%, since the month of June dismissed it at 4.007%, levels not seen since November 2008 (closed at 4.35%). This situation will continue to make it difficult for consumers with less purchasing power to access a mortgage and will continue to encourage early repayment of loans to save interest.

On the other hand, there is a kind of respite this summer, because the current value of the August price is 4.061%. That is why, surely, thousands of households will try to renegotiate the conditions of their mortgages to reduce the monthly installments and hope that the banks will continue waging a mortgage war with mixed rates.

Data from the Bank of Spain indicate that the changes in mortgage conditions in Spain included loans worth 2,503 million euros in April 2023, a figure higher than the sum of the entire previous year. The current rise in interest rates and future ones that the ECB could undertake to subdue inflation will prevent the Euribor from giving mortgages a truce in the coming months, according to Idealista. And it is that, far from starting to fall, the market believes that it will remain stable at current levels and even rise a little more.

Buying and selling in times of rising interest and inflation

The summer months tend to have less activity than other times of the year, but that does not mean that transactions do not take place. “We do not expect a worse summer in relative terms than other years,” he comments from Casavo.

In the case of the owners, it is common to observe aa decrease in housing availability compared to with other times of the year. During these months some prefer to postpone the sale of their properties until after the holidays and this causes a decrease in activity. “The same happens with many professionals who work in the sector, who tend to reduce their activity during the summer months, especially in August.”

Furthermore, during thehe summer season household spending increases due to leisure activities and travel, which can affect the ability to buy a home at this time, according to the Casavo expert. For this reason, he establishes that it is essential to carefully evaluate personal finances and ensure that they have the necessary stability before making an investment of this magnitude. “However, many people have more free time, which allows them to devote more attention to searching for and viewing properties. It is for this reason that transactions will continue to take place, at a rate similar to that of other years at this time”.