Will interest rate rises lead to a house price correction? - InterestRate.co.uk
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Will interest rate rises lead to a house price correction?

With the European Central Bank set to increase interest rates in response to rocketing inflation, many lower-income families could be left facing significant issues.

Recent reports have indicated that the European Central Bank is gearing up to increase interest rates, a shock to many who have become used to rock bottom rates.

The interest rate increases come as inflation hits its highest level in decades, and there is now speculation this could lead to a Eurozone house price correction.

The Financial Times recently reported that house prices could be set for correction as a result of these interest rate increases. House prices have been rocketing in recent years, with properties in the Eurozone said to be overvalued by around 15%.

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Officials from the European Central Bank said, “An abrupt increase in real interest rates could induce house price corrections in the near term, with the current low level of interest rates making substantial house price reversals more likely.”

The European Central Bank sounded the alarm on house prices while warning that Russia’s invasion of Ukraine could lead to more companies defaulting because of reduced growth, increased borrowing costs, and rocketing inflation levels.

The ECB discussed the possible reversal of housing markets in the region due to interest rate increases as part of its bi-annual financial stability review. It added that if there is a continued weakening in economic growth or faster-than-expected inflation rises, asset prices would drop further.

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In July, the ECB is set to increase its deposit rate for the first time in ten years, and there are predictions of four increases of a quarter-point each over the course of the year. There have already been increases in mortgage rates in the Eurozone since the beginning of 2022, with the central bank’s indicator of borrowing costs increasing from 1.3% in September 2021 to 1.47% in March 2022.

Fastest house price increases in over two decades

interest rate rises

Data from Eurostat, which is the statistical arm of the ECB, showed that house prices in the Eurozone rocketed by nearly 10% last year, which reflected the fastest rate in over 20 years. It is predicted that for every 0.1 percentage point rise in mortgage lending rates, prices could drop by between 0.83 and 1.17%.

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With regard to rising borrowing costs, the ECB said that a move toward more fixed-rate deals could offer some level of protection for households. Households with greater financial security could soften the blow by using savings or saving less money. However, poorer households could find themselves bearing the brunt of what was described as ‘the inflation shock’.