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ECB warns of housing and financial market bubbles

2022-02-08

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The European Central Bank said in its semi-annual stability report on Wednesday that the euro zone housing market is heating up, raising the prospect of a correction in residential and commercial property prices.

Demand for real estate is rising rapidly as households build up savings during the pandemic and more people work from home, pushing house prices up more than 7%, the fastest pace since 2005.

"With house price expectations rising, the risk of a medium-term price adjustment has increased substantially," the ECB wrote in the report, "particularly for households with variable-rate mortgages or mortgages with shorter fixed-rate tenor, who face risk an unexpected rise in interest rates, which could adversely affect their ability to service their debt.”

In countries such as Germany, France and the Netherlands, the real estate market is particularly hot, with new dwellings not being built at a rate that keeps pace with demand.

"Despite the recovery in residential construction, labour shortages, global supply chain bottlenecks and rising input prices are all affecting the construction sector's ability to provide more housing supply, putting upward pressure on house prices," the ECB said.

While the prime commercial real estate market is currently recovering, the report notes that the outlook for low-quality commercial real estate is "very poor" as remote work, health concerns and a boom in green real estate are driving demand towards prime commercial real estate.

On the positive side, the ECB added that although some government support measures have now ceased, the risk of a surge in corporate insolvencies, which was a major concern a year ago, has eased. "On average, the probability of corporate defaults is lower than the most optimistic forecasts in the early days of the pandemic, while the bankruptcy rate is about 15% lower than pre-pandemic levels."

In addition to the real estate market, ECB Deputy President Luis de Guindos also stressed that the "amazing rise" in equity markets and risk asset markets made them more prone to pullbacks.

"Examples of sophisticated market players exploring newer and more exotic investment vehicles have emerged. At the same time, the euro area property market has expanded rapidly, with few signs of tightening lending standards," he noted in the report.

In an interview with CNBC that day, de Guindos also mentioned the recent rise in inflation, and said that the rise in inflation in the euro zone should still be considered "basically temporary", which will be in the next few months. fade away gradually.

"I think inflation in the euro zone will probably peak in November and beyond, after which inflation will start to slow," de Guindos said.

Eurozone inflation hit 3.4% in September, a 13-year high. Euro zone inflation climbed further to 4.1 percent in October, driven by higher energy prices, car prices and accommodation costs.

At the policy meeting at the end of October, the European Central Bank announced that it would keep three key interest rates unchanged, and will continue to purchase assets under the asset purchase program (APP) with a monthly quota of 20 billion euros, as well as continue to implement the emergency 1.85 trillion euros Anti-epidemic bond purchase program (PEPP) until at least the end of March 2022, although the pace of PEPP purchases will slow down "moderately".

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ECB warns of housing and financial market bubbles

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