Real estate developed economies will face pressure due to tightening monetary policy

Qatar National Bank expected that real estate markets in advanced economies will face pressure due to tightening monetary policy and the problem of inability to afford costs, explaining that these factors together provide a difficult outlook for the real estate sector over the next several quarters.
Qatar National Bank stated in its weekly report that real estate plays an important role in advanced economies, as it is closely linked to the business cycle, and contributes significantly to the growth of the wealth of families, companies and governments. The complexities of the labor-intensive supply chain associated with the creation, financing and distribution of real estate affect a variety of sectors, including the labor market, transportation and financial services.
The report indicated that real estate or real estate property is the largest asset class in the world and serves as a major source of wealth for households. Real estate has historically proven its ability to withstand as an asset, as it allows the preservation of wealth in the long term. Indeed, over the past two generations, real estate prices have provided positive inflation-adjusted returns in all G-7 economies.
The report said that with the exception of Italy, which was affected by the euro crisis, and the United Kingdom, which was affected by Britain’s exit from the European Union, the major economies have witnessed a significant rise in real estate prices since the global financial crisis. This trend accelerated further after the COVID-19 pandemic, mainly driven by low and decreasing interest rates that reduced mortgage costs and stimulated housing demand and real estate property yields.
The report stresses that it is important to recognize that this recent strong performance does not guarantee a similar trend in the future. Historically, the real estate sector has often been at the center of major economic crises, as we saw during the global financial crisis, the US savings and loan crisis of the 1980s and 1990s, the UK secondary banking crisis between 1973 and 1975, and the Great Depression of the 1930s.
The report predicted that real estate prices in advanced economies would witness great pressure in the coming quarters due to two main factors.
When addressing the first factor, the report indicated that the rounds of strong monetary tightening launched by major central banks last year represented strong headwinds for real estate markets. Rising interest rates and diminishing liquidity can put downward pressure on real estate prices, as borrowing costs increase and access to credit decreases.
Furthermore, tight liquidity conditions could restrict the availability of credit, making it more difficult for buyers to obtain financing. This additional restriction reduces demand, which ultimately contributes to lower real estate values. It is worth noting that the impact of real estate prices on injecting liquidity into the economy remained historically behind, which provided great support in the aftermath of the pandemic. However, this pattern currently indicates that a price correction may be imminent.
The second factor mentioned in the report is that the rapid growth of real estate prices in recent years has exceeded the average increase in salaries and income, which has led to the spread of the problem of inability to afford real estate costs. In large cities with sustained non-resident demand, inflation-adjusted prices rose by an average of 60 percent, while real incomes and rents grew by only about 12 percent.
The report concluded that real estate markets in major developed economies need to cool down for a few years in order for housing affordability to recover.