Rising interest rates risk penalizing real estate, says ECB

FRANKFURT, May 25 (Reuters) – The overvalued eurozone housing market could fall if credit rates rise faster than inflation, risking the bursting of debt-funded bubbles. indebtedness, estimated the European Central Bank (ECB) on Wednesday.

It also warns in its Financial Stability Review against a continued decline in asset prices if the economic outlook deteriorates due to the war in Ukraine or if inflation turns out to be even higher than expected.

House prices in the euro area have been on a steep upward trend for several years and this movement has accelerated during the coronavirus crisis, as the ECB’s ultra-loose monetary policy has encouraged a drop in the cost of credit by pushing real rates, ie excluding inflation, into negative territory.

The central bank, which is heading for a rate hike in July, the first in more than a decade, estimates that residential property prices in the euro zone are overvalued by nearly 15% on average, a premium that may reach 60% in some countries according to its estimates, based on the correlation between prices and income.

It specifies that prices could fall by 0.83% to 1.17% for each increase of ten basis points in mortgage rates, after taking inflation into account.

“A sudden rise in real interest rates could trigger a correction in real estate prices in the short term, with the current low level of interest rates making a marked reversal in house prices more likely,” summarizes the ECB.

It also warns of the risk of a price/credit spiral in some countries, noting that Slovakia, Estonia and Lithuania are showing both the strongest increases in house prices and the strongest growth real estate loans.

She points out that the Netherlands, Cyprus and Greece have the highest levels of mortgage debt relative to gross domestic product (GDP).

The owners are however not the only ones exposed to the risks linked to the rise in rates, continues the article in the Financial Stability Review, stressing that indebted States, companies and low-income households are also vulnerable.

She adds that the conflict in Ukraine has contributed to the deterioration of financial conditions and that it could favor a further decline in asset prices.

“Further corrections in financial markets could be triggered by an escalation of war, a sharper slowdown in global growth or the need for a faster-than-expected adjustment in monetary policy,” she explains. (Report Francesco Canepa, French version Marc Angrand, edited by Jean-Michel Bélot)

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