The Delicate Dance of Interest Rates: Real Estate Wrecking Ball and Banking Squeeze

Real Estate's Dual Challenges: Interest Rate Surge and the Remote Work Revolution

Interest rates might not be historically high, however the rise over the last 18 months has been brutal. As a consequence, the process of deleveraging is unfolding with a lag but is impacting sectors, companies and the financial system like a wrecking ball. The real estate sector is, of course, a case in point. Extremely low yields for almost a decade have attracted enormous amounts of money into all kinds of real estate assets and fueled a boom in new projects. With the increase of interest rates, the required yields are rising, and hence real estate values are dropping.

On top of that, the effects of Covid, and especially the changes in our way of living and working, are also having an enormous effect on real estate. Columbia Professor Stijn Van Nieuwerburgh recently published a paper titled “The remote work revolution: Impact on real estate values and the urban environment”. According to his estimates, office values in cities like New York will drop by some 40%. Furthermore, this decline in value will have an important effect on city taxes. This phenomenon is unfortunately not limited to New York, but present in all major US cities.

European Banks Between a Rock and a Hard Place

In Europe, the rise of interest rates is impacting the banking sector, that is squeezed between mortgage rates with long maturities averaging around 1.5%, and the pressure to raise deposit- and savings rates. This situation makes the funding of these mortgages dangerously expensive, posing a threat to the profitability and stability of the banks. As a consequence, we stay away from interest rates sensitive sectors. Soon, central banks will acknowledge that they cannot raise interest rates further to combat inflation as it threatens financial stability. The cost of Draghi’s “Whatever it takes” from 2012 is showing up: after asset inflation, now financial instability. No surprise, but still a word of caution is timely.

Posted by Geert Noels on 01 Jun 2023

0 comments

About the author

Geert Noels

Geert Noels is Group CEO and Chief Economist of Econopolis, an independent asset manager and economic consultancy firm. He is best known to the general public through his columns in various newspapers and his presence on TV and radio programs as economic expert. His advice is regularly requested by various organizations and authorities, who appreciate his creative thinking and completely independent macroeconomic vision. He is the author of Econoshock (2008), which deals with the six shocks that are currently changing our economy, society and daily life. Econoshock also forms the basis and guideline for Econopolis' strategies.

In 2019 his second book Gigantism was published. Gigantism is a strong plea against companies and organizations that are getting bigger and more powerful. It kills healthy competition, leads to unsustainable growth and oppresses people. In Gigantism, Geert proposes ten solutions that adjust the economic rules, tame the giants and give people and the environment a place in the global economy again.

In December 2022, Geert Noels' last book "The Climate Shock - 20 solutions for governments, companies and citizens in Belgium" was published, written with colleagues Kristof Eggermont and Yanaika Denoyelle. The book describes how we can tackle this urgent crisis and use it to make Belgium more prosperous and paints a realistic picture of a bright future.