Why Rising Interest Rates May Signal Trouble for the Housing Market

Thousands of borrowers feel the sting of rising interest rates as their monthly mortgage payments increase by hundreds of euros. This has caused concerns about the housing market, with fears of a real estate slump on the horizon.

The European Central Bank has already raised interest rates by three percentage points since July, indicating that they will continue raising them to tackle inflation. This has resulted in monthly mortgage payments rising by several hundred euros for many households.

Impact on Homeowners

The average mortgage interest rate in July was 2.5%, and the maximum was 3%. However, since the ECB has increased, mortgage rates are now between 5.5% and 5.75%. Hence, most housing loans being taken out with a flexible interest rate regulated by the market, the monthly payment for a €200,000 loan has increased by €345. When the additional increase is expected in mid-March, the overall interest rate will be between 6% and 6.3%, meaning the increase will be over €400, pushing the monthly installment close to 1,470. This puts additional pressure on households struggling due to high inflation rates.

Impact on First-Time Buyers

Young couples just starting will think twice before taking on a mortgage. With the increase in interest rates, they will have to pay more each month, making it difficult to save for other things like children’s education, retirement, or a rainy day. This is discouraging first-time buyers who are already struggling to afford a new home in a market with high prices.

Impact on the Housing Market

Real estate agents have already noted a drop in demand in the housing market due to rising inflation and interest rates. When interest rates increase, the cost of borrowing goes up. This means many people can no longer afford to buy a home. With fewer buyers, the market becomes saturated, and prices can fall, leading to a slump in the housing market.

The Way Forward

In the view of Eleni Averkiou, a Danos/BNPRE Group property consultant, soaring interest rates can harm the housing market’s growth. To balance out the negative impact on households, Averkiou proposed the government should consider a one-off grant to help families buy their first home. She believes this should be combined with projects to breathe new life into city centers, suburbs, or rural areas. Moreover, the government and the new Finance Minister should look into finding ways to support new home buyers.

Related Facts

• The European Central Bank controls the monetary policy of the euro area.
• Higher interest rates may lead to decreased inflation and help stabilize the economy, but they can also lead to decreased demand for goods and services.
• Rising interest rates can deter some buyers, making it more expensive to borrow money, which can slow down the housing market’s growth.

Key Takeaway

Rising interest rates may signal trouble for the housing market as monthly mortgage payments rise, making it more difficult for households to afford a new home. This could also lead to a slump in the housing market, making it difficult for anyone to sell their property. With fewer buyers comes a saturated market, and prices can fall. Governments can help mitigate rising interest rates by introducing measures to support new homebuyers, such as one-off grants to purchase a first home.

In Conclusion

Undoubtedly, rising interest rates can be worrying for those struggling to pay their bills. While it is good for the economy, it can slow down the housing market, affecting those who have saved diligently for a down payment. By engaging in controlled monetary policy, governments can help balance out the impact of interest rates on households, particularly for new homebuyers just starting on their journey in real estate.