Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278365 
Year of Publication: 
2023
Series/Report no.: 
ECB Working Paper No. 2789
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
The acceleration of house price growth amidst falling interest rates to record-low levels across euro area countries between 2015 and 2021 has sparked renewed interest in the link between the two variables. Asset-pricing theory suggests that real house prices respond to changes in real interest rates in a non-linear fashion. This non-linearity should be especially pronounced at very low real interest rates. Most existing empirical studies estimate models with a constant semi-elasticity, thereby ruling out by design the potential non-linearities between house prices and interest rates. To address this issue, we estimate a panel model for the euro area countries with a constant interest rate elasticity (as opposed to a constant semi-elasticity), which is consistent with asset pricing theory. Our empirical results suggest that, in a low interest rate environment such as the period between 2015 and 2021, non-linearities in the house price response to interest rate changes are important: an increase of real interest rates from ultra-low levels could lead to downward pressure on real house prices three to eight times higher than the literature suggests.
Subjects: 
house prices
interest rates
elasticity
non-linearity
JEL: 
E43
E52
R21
R30
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5985-8
Document Type: 
Working Paper

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