What Drives Long-Term Real Estate Interest Rates?

Figures 3, 4 and 5 show the path of nominal and real long-term interest rates in the U.S., U.K. and Germany since 1961. The gap between the two lines is expected inflation. Nominal rates can change either because real rates change, or because expected inflation changes. The reasons behind the fall in real interest, which dates to the early-to-mid 1980s, have been much debated by economists. While the simple explanation is that there is too much savings chasing too few investments, consider these other factors:

  • Demographic trends, such as aging baby boomers saving for their retirement in the West and similarly big shifts in the age structure elsewhere (increased supply of capital).
  • The shift of manufacturing activity from low savings economies in the West to China and elsewhere in Asia, where savings rates are higher (increased supply of capital).
  • A rise in the global population of high-net-worth individuals (increased supply of capital).
  • The falling cost of investing in physical capital (e.g., computers), leaving companies with more profit retention (reduced demand for capital).
  • Slowing global growth, due to an aging population and/or fewer innovations (reduced demand for capital).



Source: CBRE/Macrobond, August 2018.



Source: CBRE/Macrobond, August 2018.



Source: CBRE/Macrobond, August 2018.

This analysis uses credible data and econometric modeling techniques to determine the supply or demand drivers of real and nominal interest rate movements over a lengthy period. The main components of this approach:

  • Use of 10-year interest rates in the U.S., U.K. and Germany.
  • Analysis of nominal interest rates with inflation embedded in the model to determine real interest rates (Appendix 1).
  • Use of data from the 1960s onward to cover a period when interest rates (real and nominal) both rise and fall.
  • Testing of a range of demographic variables as proxies for the demographic impact on the global savings/investment imbalance to find the one that best fits the data and produces the best model.
  • Focus on long-term properties and ensuring the model passes stringent statistical tests.

Key Findings


  • Global demographics are the key to falling interest rates. The share of the world’s population aged 40 to 54 is the key demographic variable. It is statistically significant and has a similar impact in all three countries.
  • GDP growth is also important for the U.S. and Germany but not as important as some economists suggest (i.e., that real interest rates move in line with GDP growth). A 100-bp increase in real GDP increases U.S. long-term interest rates by 18 bps (at most in the various cases considered) and by 10 bps in Germany. There is no statistical relationship between GDP growth and real long-term interest rates in the U.K.
  • The evidence that QE has a significant impact on interest rates is weak in all three countries. The results indicate that a 100-bp change in the ratio of QE in government bonds to GDP changes real and nominal long-term interest rates by between only 6 and 8 bps.
  • The rise of high-net-worth individuals has had no impact on interest rates.
  • The Chinese balance-of-payments surplus as a percentage of world GDP was used as a proxy for the rise of China and had no significant effect on U.S. interest rates.

"The evidence that QE has a significant impact on long-term interest rates is weak in all three countries."

CBRE’s analysis suggests that global demographics have been the major reason why real interest rates have fallen since the mid-1980s. QE plays a bigger role when focusing on the period since the GFC. In the U.S., ongoing demographic change was about twice as important as QE in driving down real interest rates after the GFC, possibly due to the global nature of the U.S. bond market. In the U.K. and Germany, however, the implied contributions from QE and demographic change were approximately equal.

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