Rates versus real estate

27th February 2017

Vitangelo Pagliarulo, Junior Financial Analyst

Real estate is often considered as the perfect bond proxy. As a reminder, a bond proxy is a sector whose performance is very similar to the bonds’ one. In an environment of low interest rates these sectors tend to perform well. On the contrary, in an environment of rising interest rates, they underperform.

Though, when analysing the performance of the real estate sector over the long term, we can see that this relation is not so obvious. It even tends to change depending on the economic conditions. As a matter of fact, over the last ten years, the correlation between interest rates and the sector’s performance has been very low (0.09) in continental Europe. However, if we do the same analysis over the last three years, which coincides with the beginning of the quantitative easing in Europe, the correlation is much stronger (0.71).

As we might soon move into an environment of rising rates, anticipating the impact this could have on the real estate market appears thus pretty complicated.