The recent hikes in interest rates by the ECB seem to be cooling the demand for
houses alleviating inflation pressures on the sector. Slower demand side
pressures are impinging on real state inflation. For Spain, a notorious case
of real state booming, housing price inflation dropped to 7.3 % in March.
Policy makers are expecting a soft landing in the housing sector. It is not
clear what a soft landing means, as we have not seen a wording of the term
by policymakers. Most probably they mean a rate of increase in real state
similar (or even slightly below) to those of a standard consumer price index
and a low delinquency rate when the mortgage burden increases (as rates
soar). That is, the real state boom is swallowed slowly by the economy
during a long period and we see housing price stagnant. The hard landing scenario
much disliked by policy makers, is an scenario where there are
sharp falls in real state prices, the value of the collateral in mortgage
loans decrease, there are high delinquency rates with buyer having
difficulties to honor mortgage payments, and the banks balance sheet
deteriorates.

Someone should regret from the mistakes of the past. Interest rates have been sitting
at 2 percent from June 2003 to December 2005 when real state prices where already
increasing at two digit levels. Rates are now at 3.75 per cent and there is another move
to 4 percent coming in June. Two little, too late to avoid hard landing?