The impact of ECB rate cut on the real estate market

The recent announcement of a rate cut by the European Central Bank (ECB) signals a shift from the restrictive monetary policies implemented in recent months to combat inflation.As we await further potential rate reductions this year, let's see how this decision affects the real estate sector.

After a long period of anticipation, the European Central Bank has finally decided to lower interest rates. The announcement, made on June 6th, was well received by financial markets, signaling the end of a series of ten consecutive rate hikes aimed at combating inflation, which peaked at 11.5% in Europe in October 2022.

While the Federal Reserve chose to wait, keeping rates unchanged pending clearer signs of price stabilization, the ECB's governing council opted to take the first step towards easing restrictive measures. This decision was supported by data indicating that inflation is closer to the Bank's 2% target, with a rate of 2.4% reported in April.

The ECB's decision

The ECB cut its three benchmark rates by 25 basis points:

• • The interest rate on main refinancing operations decreased from 4.50% to 4.25%
• • The rate on marginal lending facility was reduced from 4.75% to 4.50%
• • The deposit facility rate was lowered from 4% to 3.75%

This is the first rate cut since September 2019, when it was implemented by the then-president of the ECB, Mario Draghi. This move, while displaying inevitable caution, aims to provide some relief to various sectors, particularly real estate. It’s no secret that, over the last months, families and investors have had to revise their spending plans due to high rates and increasing difficulties in accessing mortgages.

The effects on mortgage rates

In the weeks leading up to the official announcement, interest rates had already begun to decline, stimulating a recovery in mortgage demand. For instance, by May, the 10-year IRS rate (the benchmark for fixed-rate mortgages) dropped to 2.77%, a decrease of 75 basis points from the peak recorded in October 2023. Similarly, the 3-month Euribor (used for variable-rate mortgages) also saw a decrease, settling at 3.82%, which is 18 basis points lower than last year's highs (source: ABI)

Despite this rate cut fostering some optimism, the tangible effects on mortgage rates remain limited, especially considering they had increased by 60%-70% over the past twelve months. According to MutuiOnline, the monthly savings for a variable-rate mortgage of 120,000 euros over twenty years would be approximately 16 euros, while for a 25-year mortgage, the savings would rise to 29 euros per month. It is clear that a return to previous levels will not be rapid unless there are further significant cuts by the ECB capable of producing a more pronounced impact.

Moreover, while under normal conditions, variable-rate mortgages were often preferred for their long-term advantages, in the current economic context, the trend has reversed, and fixed-rate mortgages have become the predominant choice. The Mortgage Observatory of Segugio.it reports that in the first quarter of 2024, requests for fixed-rate mortgages represented 98.1% of the total. Nevertheless, it should be noted that there is always the possibility of adapting to market changes: if variable rates were to decrease significantly within reasonable time frames, borrowers can change their mortgage through a mortgage subrogation.

Opportunities for the real estate market

There is no doubt that more accessible and less expensive mortgages provide a significant boost to the real estate market. Although substantial benefits from mortgage rate reductions will take time to materialize, the rate cuts still have a reassuring effect on both investors and consumers, who regain confidence in the prospect of a more stable market.

The residential sector will benefit the most from the ECB's decision, as it has been the most affected by the rise in interest rates over the past two years. Demand for home purchases, which saw a 10% decline in 2023 (source: Nomisma), is expected to resume growth in the second half of this year. However, the strength of this recovery will depend on the extent and speed of the ECB's rate cuts, as well as inflation trends.

Meanwhile, the rental market continues to expand, with rental prices increasing by 6.9% in the second quarter of 2024, reaching a record average of 14.1 euros per square meter, an 11.4% rise compared to June 2023, as reported by the Idealista portal.

Will there be further rate cuts in 2024?

The ECB has clarified that, despite the rate cut in June, it is not yet certain whether there will be additional interest rate cuts throughout 2024. Future decisions will depend on macroeconomic data, particularly inflation trends, which remain closely monitored, since current ECB forecasts indicate an inflation rate above 2% at least until 2026.

Ongoing global crises are contributing to an atmosphere of uncertainty, challenging international geopolitical balances and posing serious potential consequences for the global economy. The war in Ukraine, for instance, has significantly impacted the energy market, leading to a notable increase in gas and oil prices.

Before the June announcement, many economists believed it was almost certain there would be three rate cuts by the end of the year. Now, experts are more cautious, suggesting a scenario of slow and gradual reductions as the most likely outcome.