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House prices and ultra-low interest rates: exploring the nonlinear nexus

Author

Listed:
  • Daniel Dieckelmann

    (European Central Bank)

  • Hannah S. Hempell

    (European Central Bank)

  • Barbara Jarmulska

    (European Central Bank)

  • Jan Hannes Lang

    (European Central Bank)

  • Marek Rusnák

    (European Central Bank)

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 nonlinear 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 the potential non-linearities between house prices and interest rates by design. To address this issue, we estimate a panel model for the euro area 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 in 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.

Suggested Citation

  • Daniel Dieckelmann & Hannah S. Hempell & Barbara Jarmulska & Jan Hannes Lang & Marek Rusnák, 2025. "House prices and ultra-low interest rates: exploring the nonlinear nexus," Empirical Economics, Springer, vol. 68(3), pages 1001-1037, March.
    • Handle: RePEc:spr:empeco:v:68:y:2025:i:3:d:10.1007_s00181-024-02662-4
    DOI: 10.1007/s00181-024-02662-4
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    More about this item

    Keywords

    House prices; Interest rates; Elasticity; Non-linearity;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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