Interest rates up – prices (strongly) down. This is what we have been hearing and reading for months. From our daily tendering practice we know that many market participants see it much more differentiated. We have therefore taken a closer look.
We have looked at the empirically observable facts over a long period from III/1973 to IV/2021. In our view, the best basis is provided by the quarterly house price index of the Federal Statistical Office. It is based on the actual transactions reported via the expert committees. This means that virtually all transactions and their actual prices are included. However, by their very nature, real estate prices cannot be observed directly over time, as individual properties differ in terms of price-relevant characteristics, individual properties are rarely resold and their quality changes over time. The indices take this into account by applying so-called hedonic procedures. These procedures have the effect of smoothing and, under certain circumstances, of making the reported price developments less volatile than the actual price developments.
The analysis over the long period shows for German residential real estate that its prices (i) decrease significantly with rising interest rates, (ii) partially offset (energy) inflation, (iii) increase slightly with growing GDP, and (iv) increase in the long run with population growth. Using the data, we were able to isolate the influences of the individual factors and quantify effects of changes in the initial parameters (e.g. the rise in interest rates in H1 2022) on prices.
It turns out that the aforementioned correlations are economically much weaker than suggested by the frequently heard theses “rising interest rates depress real estate prices” “real estate prices rise with inflation”. Moreover, we were only able to find them in the case of residential real estate; in contrast, no interest rate and inflation effects can be found in the case of the office and retail asset classes.
Of course, even this empirical-historical study does not allow us to draw any firm conclusions about how prices will develop in the future. However, it does provide information that can help asset managers, developers and financiers in their market assessments.
The study is published in Absolut 06/2022 (December) and available for subscribers there.