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

Daniel Dieckelmann, Hannah S. Hempell, Barbara Jarmulska, Jan Hannes Lang and Marek Rusnák

No 2789, Working Paper Series from 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 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. JEL Classification: E43, E52, R21, R30

Keywords: elasticity; house prices; interest rates; non-linearity (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-eec and nep-ure
Note: 1743488
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Journal Article: House prices and ultra-low interest rates: exploring the nonlinear nexus (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232789

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