Real estate prices in the euro zone could fall significantly messy “In view of the high borrowing rates in the sector which make housing acquisitions unaffordable for households, and unattractive for investors, estimated this Wednesday, May 31 the European Central Bank (ECB).
The Frankfurt Institution notes this risk in its Financial Stability Report (FSR) alongside high credit costs and slowing economic growth, all of which are weighing on businesses and households, which could eventually affect banks and other financial institutions.
Since July 2022, the ECB has raised the cost of credit by a total of 375 basis points to raise its deposit rate to 3.25% in order to curb persistent inflation. A further rise in the cost of money is expected next month. After years of low and even negative interest rates, the impact of the current monetary tightening cycle is beginning to be felt in the real estate market.
“ Going forward, a fall in prices could occur in a disorderly fashion, as rising interest rates on new home loans increasingly undermine their affordability and increase the interest burden on existing home loans, particularly in countries where floating rate loans dominate writes the ECB.
The institution did not name these countries, but its data shows that Portugal, Spain and the Baltic countries are among the Member States with the highest proportion of variable rate mortgages. According to the ECB, regions of Europe where institutional investors have taken significant positions in the residential real estate market could also be more severely affected by an ebb of liquidity. The Central Bank cites in particular Berlin, certain regions of western Germany and certain capitals such as Paris, Madrid, Lisbon and Dublin.
On the positive side, the ECB noted the strength of the labor market, which reduces the risk of a default on the repayment of loans taken out by households.
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