Residential real estate could be economies’ weak spot

There is now talk of what could trigger a hard landing in the US and euro-zone economies. One possible candidate is residential real estate. Currently, residential real estate prices are rising very rapidly and residential construction remains vigorous. But the question is whether rising interest rates might cause a sharp fall in demand for housing. Indeed, rents are not keeping pace with inflation at all, so residential real estate is not providing a hedge against inflation. Moreover, given the rise in real estate prices, the rental yield on residential real estate is becoming low. If it falls below bond yields, there could be sharp falls in demand for housing, residential real estate prices and residential construction, which could trigger an economywide fall in activity. It is therefore important to keep an eye on the relative levels of residential real esta t e yields and long-term interest rates.