With central banks in most countries around the world beginning a wave of monetary tightening (raising interest rates and withdrawing liquidity from the market) at the end of last year, the cost of borrowing in the market increased, affecting various sectors and asset values. Among the sectors that serve as a store of value in many countries is the real estate sector. Although this impact has begun to appear slightly in the numbers of residential property sales transactions in important markets such as Britain, the United States, Canada, and others, as well as in the decline in the number of approved mortgage loans, the commercial real estate and rental residential buildings sectors are witnessing a more noticeable decline.

Real estate prices, of various types, have indeed begun to fall, meaning a slowdown in price growth to the point of stagnation in some markets. The Financial Times published in its weekly edition on Saturday an extensive investigation into the real estate sector and its exposure to interest rate hikes, collecting various opinions from real estate companies and investors in the sector. For example, in Canada, Brenda McKinley, who has worked in the Ontario real estate buying and selling sector for over two decades, says that homes in the area have lost about 10 percent of their value during the closing of sales deals over the last six weeks.

A General Phenomenon

The decline in property asset values and sales prices is not limited to Ontario or Canada alone, but the question is repeated among investors, property owners, and potential buyers in more than one country about whether the continued raising of interest rates will lead to a collapse of the real estate market. Chris Brett, Head of Europe, Middle East, and Africa at the real estate agency CBRE, says, "There is a clear slowdown everywhere... the change in borrowing costs affects all markets and all sectors. I do not think there is any sector that is immune. The speed of change surprised us."

One of the indicators monitored by investors to signal the direction of the real estate market is the shares of real estate registered in stock exchange indices, which have dropped sharply this year so far. For example, the US real estate index on the Dow Jones in the New York Stock Exchange has dropped 25 percent since the beginning of the year to date. As for British real estate shares listed on the London Stock Exchange, their value has decreased by 20 percent this year. All of these are larger declines in real estate shares than the declines in general indices.

According to data from the global stock index MSCI, the number of buyers targeting real estate stock deals in the United States, Asia, and Europe has sharply declined from its highest levels during the Corona pandemic period, with the number dropping from 3,395 investors in the last quarter of last year to only 1,602 investors in the second quarter of this year. The value of deals has also declined; for example, in Europe, it reached about $12 billion at the end of last March, compared to about $18 billion (17 billion euros) in the same month last year.

Not only that, but the deals being completed are also subject to reassessment and price reductions. Ronald Dickerman, CEO of the real estate brokerage company Madison International Realty, says, "Any seller of anything now faces a price reduction by potential buyers, or else the buyer withdraws from the deal. Everyone valuing a building now is forced to reassess. It is hard to imagine the amount of price reduction occurring currently in the real estate sector."

Commercial Real Estate and Offices

During the Corona pandemic period, investor demand increased for commercial buildings such as storage spaces and warehouses due to the massive demand for e-commerce during lockdown periods amid the pandemic crisis.

Demand also increased for office building spaces with health specifications, while the demand for old office buildings nearly collapsed as the majority resorted to working from their homes during the pandemic period, which also witnessed a rise in the value of rental residential properties such as apartment buildings and housing complexes.

However, all that has changed now after the end of lockdowns and the beginning of central banks raising interest rates, increasing the cost of borrowing for investors and even buyers of real estate units. A study from Columbia University in the US indicated that working from home and the collapse of the commercial real estate sector caused the total value of office real estate in New York City to drop by about one-third. This harms pension funds and others that hold a large share of stocks in that sector and rely on its yields to continue paying their benefiting members.

Stephen Van Nieuwerburgh, professor of finance and real estate at Columbia University and one of the study participants, says, "We estimate that all office sector shares have lost 30 percent of their value compared to 2019, meaning the sector has lost $500 billion of its value."

In Britain as well, owners of office buildings face a similar challenge. The real estate consultancy company Lambert Smith Hampton estimated this week that the surplus supply in the UK's office building market exceeds 7.6 million square meters (25 million square feet), after a company survey in which 72 percent responded that they plan to reduce the office space they use for their work.

Homes and Residential Properties

The decline may not appear as clearly in the residential real estate sector, but the numbers for sales transactions of homes and apartments in Britain have declined in the last two months, indicating a slowdown in growth in the real estate market. According to real estate brokerage companies, completing property deals now takes longer than it did a few months ago, and the asking prices are often reduced by sellers to complete the deals, as data from the Bank of England also showed a decline in the number of approved mortgage loans in the recent period.

Oxford Economics research company expects house prices to decline in most markets, from the United States to Germany and New Zealand. Residential property prices in those markets had witnessed a significant increase last year.

However, many economists and analysts in the real estate market do not expect a collapse of the real estate sector similar to that of the global financial crisis in 2008. According to the Financial Times, quoting the head of one of the largest real estate investment funds, there were about 20 companies in danger before the global crisis, but now the number might not exceed five companies. He adds, “Many asset valuations before the global financial crisis were fake and deliberately exaggerated, but the situation now is different.”

In summary, with the increase in borrowing costs due to raising interest rates, some aspects of the real estate sector may witness a significant decline, but overall the chances of a complete collapse of the real estate market are still remote.