How High Interest Rates Affect the Real Estate Market in the US and Europe?

The real estate market has been booming in the United States and Europe in recent years, but investors have become hesitant to enter the market with the rising material prices and interest rates.

The real estate market has been booming in the United States and Europe in recent years, but investors have become hesitant to enter the market with the rising material prices and interest rates. The US Federal Reserve (Fed) along with the European Central Bank (ECB) and central banks in other developed countries are raising interest rates aggressively to curb inflation. However, this move to increase interest rates may disrupt construction activities due to the increased cost of capital and exacerbate the housing shortage, which in turn leads to further inflation.

Rising interest rates have negatively impacted construction activity in both the US and Europe. In the US, the number of new construction permits issued to private companies to build houses in April fell by 21.1% year-on-year. Meanwhile, the number of construction works also decreased by 22.3% over the same period, according to data from the US Census Bureau (DOC). According to data from Moody's, in the fourth quarter of 2022, the number of residential construction permits in the euro area decreased by 13% compared to the same period last year. Construction activity is also slowing down as a result.

How High Interest Rates Affect the Real Estate Market in the US and Europe?

While the housing market continues to thrive and the cost of living increases, home buyers may have more difficulty purchasing a home due to higher interest rates. This causes the demand to buy real estate to decline, and many real estate developers are postponing the construction of new projects. Furthermore, some economists expect construction activity to fall further if interest rates remain high.

As interest rates rise, the cost of borrowing money increases, which can have a significant impact on the real estate market. The increased cost of capital for investors and developers leads to higher costs for consumers. In big cities with high costs, households often spend more than a third of their income on rent, so the impact of rising interest rates will be even greater for them. According to the chief economist of Zonda Company, Ali Wolf, the real estate market is facing disadvantages such as high land prices and construction costs due to a shortage of labor and expensive construction materials.

The ECB's decision to raise interest rates has nearly quadrupled interest rates on construction loans, from a previous rate of less than 1% to nearly 4%. Higher capital costs make construction more difficult to make a profit as well. Vonovia, the largest apartment rental company in Germany, has stated that they have no intention of starting any new projects this year due to the increased inflation and interest rates.

While rising interest rates may cause some hesitancy in the real estate market, there are several ways to combat it. For example, real estate investors can opt for longer-term debt or adjustable-rate mortgages that fit their investment strategies best. Additionally, investors can try to negotiate with lenders to secure lower rates.

The real estate market in the US and Europe is facing challenges due to rising interest rates and a shortage of supply. With interest rates expected to remain high in the near future, the market may face continued slowdowns and challenges. However, with strategic planning and careful consideration of market trends, it is possible for investors to navigate the market with success.