In its latest Financial Stability Review, the European Central Bank points to the risks associated with the exuberance of certain markets, particularly real estate, where prices have risen at the fastest rate in 16 years.

“Euro area house prices rose at their fastest pace since 2005 in the second quarter of 2021, amid signs of easing mortgage lending standards”, observes the ECB. While the economic recovery has also supported near-term fundamentals for the housing market, continued strong house price growth of around 7% at the euro area aggregate level remains a cause for concern amid signs of more broad-based price increases across both urban and non-urban areas, pursues the ECB.

Some of this rise could reflect an increase in demand for housing (including larger properties) during the pandemic. But growing signs of overvaluation for the euro area as a whole render residential real estate (RRE) markets more prone to a correction, in particular in countries with more elevated valuation levels, warns the Frankfurt-based institution. In some countries, the strength of RRE markets is coupled with buoyant mortgage lending, and there is evidence of a progressive deterioration in lending standards, as reflected by the increasing share of loans with high loan-to-value and loan-to-income ratios. High and rising levels of household indebtedness also contribute to heightened medium-term vulnerabilities in some countries. Taken together, these developments have strengthened the case for considering further activation of macroprudential policy measures, where appropriate.

Commercial real estate (CRE) markets have benefited from the improving economic outlook, but parts of the market remain vulnerable to further price corrections, also notes the ECB. Investor sentiment has improved over recent quarters, but a substantial share of CRE investors still see the market in a downturn. The outlook seems particularly poor for lower quality CRE assets, with market intelligence flagging remote working, health concerns and the rush for greener property as channelling demand towards the prime segment. This intersects with elevated vulnerabilities among those sectors most affected by the pandemic, namely retail and office assets. Transaction data suggest substantial holdings of these most vulnerable assets across the euro area financial system, in particular for non-banks.


Publié le 22 novembre 2021