Interest Rates and Real Estate Markets: Empirical Evidence from Switzerland

For more than a decade, we have seen a rise in real estate prices simultaneously with a decrease in interest rates. In this article, we demonstrate how and to what extent interest rate changes influence prices in real estate markets. We apply a vector autoregressive model with cointegrating variables to examine this relationship during the years between 2007 and 2020. Using times series of different segments of the real estate market, we find significant negative responses of investment property prices and rents to a positive interest rate shock while apartment and house prices positively react. Considering mortgage interest rate shocks, we again find a divided picture, which fosters the perception of different behaviour of real estate segments responding to interest rate shocks. The results suggest that these differences can be explained by the different composition of investors and planned utilisation in the considered segments.