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ECB rate hikes already weighing on housing; bigger impact to come – study

European Central Bank rate hikes are already weighing on housing investment across the euro zone and the impact is likely to increase, although it will be smaller than in the United States, the ECB said in a study on Wednesday.

The ECB has raised interest rates by a combined 375 basis points since last July and further rate hikes are likely given sky-high inflation and the risk that price growth gets stuck above the ECB’s 2% target.

Even further out, the ECB’s benchmark rate is only seen coming back down to 2%, suggesting that 2.5 percentage points of the recent rate hikes could be permanent, proving a drag on housing spending.

“A temporary monetary policy shock that increases the short-term interest rate by 1 percentage point on impact leads, all else being equal, to a decline in housing investment in the euro area of around 5% after about three years,” the ECB said in an Economic Bulletin Article.
In the United States, however, a similar rate shock would lower housing investment by around 8% after about three years, the ECB said, noting big differences in how the housing and mortgage market work on the two opposing sides of the Atlantic.

The ECB added that housing investment in the euro zone started to decline in the second quarter of last year and fell by a cumulative 4% by the end of the year.

However, the decline in the U.S. started in the second quarter of 2021 and housing investment fell by around 21%.

The ECB earlier predicted a “protracted and substantial” decline in euro area housing investment in 2023 and 2024.
Source: Reuters (Reporting by Balazs Koranyi Editing by Christina Fincher)

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