The real estate sector is one of the fundamental pillars of the economy. One of the most influential variables in this sector is the interest rate, a percentage that determines the cost of mortgage loans, affects the demand and supply of properties, and has repercussions on the value of real estate. Below, we explore in detail how interest rates decisively impact the real estate sector.

What is the relationship between interest rates and mortgages? 

The most direct impact of interest rates on the real estate sector is manifested through the cost of mortgages. When interest rates are low, the cost of mortgage loans decreases, making it easier for potential buyers to access the necessary financing to purchase a home. Generally, this circumstance translates into an increase in demand for properties, as the number of people who can afford to buy a home is higher due to more affordable monthly payments.

Conversely, when interest rates rise, mortgages become more expensive. Buyers must face higher monthly payments, reducing financial accessibility to purchase homes. As a result, demand for properties tends to decrease, negatively affecting sales volume and, in many cases, putting downward pressure on property prices.

The impact of interest rates on housing demand and prices

Changes in interest rates can significantly influence housing demand. With low interest rates, not only is mortgage accessibility increased, but there is also a perception of opportunity in the market. Thus, buyers tend to act quickly to take advantage of low financing costs, which can lead to an increase in housing prices due to greater competition for the available properties.

However, if interest rates rise, the effect may be the opposite. The decrease in demand can lead to a slowdown in the real estate market, with a lower sales pace and, in some cases, a drop in housing prices. This phenomenon is particularly noticeable in markets where prices are already inflated, and buyers are more sensitive to changes in financial conditions.

Interest rates when investing in the real estate sector

Investors in the real estate sector are also affected by changes in interest rates. In a low-interest-rate environment, the cost of financing real estate projects is lower, which may encourage developers to launch new projects. Additionally, investors may be more inclined to acquire properties as investment assets, as returns can be attractive in a low-interest-rate context.

On the other hand, when interest rates rise, financing costs also increase, which may discourage new real estate investments. Projects may become less profitable, and investors may choose to redirect their capital towards other assets with lower financing costs or that offer better risk-adjusted returns.

What is the effect of interest rates on the real estate supply?

Interest rates also have a significant impact on the supply of housing. When interest rates are low, real estate developers find it easier to finance the construction of new homes, which increases the supply in the market. This can balance or even reduce housing prices if supply exceeds demand.

However, with high interest rates, construction and financing costs rise, which may lead to a decrease in new housing construction. This reduces the available supply in the market, which can put upward pressure on prices, especially in markets where demand remains strong.

Economic cycles and interest rates

The economic cycle also plays a crucial role in the relationship between interest rates and the real estate sector. During the expansion phases of the economy, central banks may raise interest rates to prevent the economy from overheating. This can moderate the growth of the real estate market, reducing the risk of real estate bubbles.

In contrast, during recessions, central banks often lower interest rates to stimulate the economy. This low-interest-rate environment can revitalize the real estate sector by making financing more affordable and increasing demand for housing, which in turn can help boost economic recovery.

At MUNFORT, we offer comprehensive assistance in the process of finding the best mortgage or financing option for home purchase. With our experience and knowledge, we will guide you through the various options available in the market, taking into account factors such as interest rates, terms, and conditions. This assistance ensures that clients make informed decisions and obtain the most suitable financing for their needs and individual circumstances.