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

Daniel Dieckelmann (), Hannah S. Hempell, Barbara Jarmulska, Jan Hannes Lang and Marek Rusnák
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Daniel Dieckelmann: European Central Bank
Hannah S. Hempell: European Central Bank
Barbara Jarmulska: European Central Bank
Jan Hannes Lang: European Central Bank

Empirical Economics, 2025, vol. 68, issue 3, No 2, 1037 pages

Abstract: 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.

Keywords: House prices; Interest rates; Elasticity; Non-linearity (search for similar items in EconPapers)
JEL-codes: E43 E52 R21 R30 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-024-02662-4

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