House Prices and Ultra-Low Interest Rates: Exploring the Non-Linear Nexus

40 Pages Posted: 24 Feb 2023

See all articles by Daniel Dieckelmann

Daniel Dieckelmann

European Central Bank (ECB)

Hannah Sabine Hempell

European Central Bank (ECB) - Directorate General Macroprudential Policy and Financial Stability

Barbara Jarmulska

European Central Bank (ECB)

Jan Hannes Lang

European Central Bank (ECB)

Marek Rusnák

European Central Bank (ECB)

Date Written: February, 2023

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 con-stant 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.

Keywords: elasticity, house prices, interest rates, non-linearity

JEL Classification: E43, E52, R21, R30

Suggested Citation

Dieckelmann, Daniel and Hempell, Hannah Sabine and Jarmulska, Barbara and Lang, Jan Hannes and Rusnák, Marek, House Prices and Ultra-Low Interest Rates: Exploring the Non-Linear Nexus (February, 2023). ECB Working Paper No. 2023/2789, Available at SSRN: https://ssrn.com/abstract=4368835 or http://dx.doi.org/10.2139/ssrn.4368835

Daniel Dieckelmann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Hannah Sabine Hempell

European Central Bank (ECB) - Directorate General Macroprudential Policy and Financial Stability ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Barbara Jarmulska

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jan Hannes Lang

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marek Rusnák

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
148
Abstract Views
564
Rank
358,685
PlumX Metrics