Rising rates have a stronger effect on affordable housing prices
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Rising rates by central banks and heightened uncertainty in the global economy have pushed up the cost of capital and weighed on rising asset prices in recent years, including real estate, International Monetary Fund (IMF) economists Serhan Cevik and Sadna Naik said in a study. The paper considered the markets of Russia, Turkey, the Czech Republic, Poland, Estonia, Hungary, Latvia, Lithuania, Slovakia and Slovenia, taking into account the real price indices of the Bank for International Settlements for 1998–2022.
The authors of the study record that in the first half of this year in most of these countries, real estate prices were kept at fairly high levels. Now they are declining – new monetary shocks and a slowdown in household income growth can lead to a new significant price correction, the authors of the study believe.
They note that the most important factor determining the rise in real estate prices is the increase in incomes of the population. Moreover, this effect is more pronounced in more expensive market segments: with a median GDP growth of 2.6%, the increase in housing prices was 2.7%, the average level of rates was 5%, and real income growth was 4.8%. After the financial crisis in 2008, GDP growth began to have a less pronounced effect on prices compared to changes in rates (this may be due to an increase in mortgages in emerging markets). The paper notes that the increase in rates has a stronger effect on affordable housing and the effect will be more pronounced, the higher the share of mortgage lending and the debt burden of households. In the case of long-term rates, the effect will be negative in both expensive and inexpensive market segments.
Increasing unemployment has little effect on the real estate market, while population growth leads to higher prices, primarily for affordable housing, the authors point out. Inflation also has a negative but statistically insignificant effect. In turn, a sharp change in housing prices can have a negative effect on economic activity and financial stability, therefore, in order to correct the drawdown in the market, the IMF proposes to soften requirements for banks, as well as vary taxation conditions.
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