25 mei 2022
13:13
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The European Central Bank (ECB) underlines that real estate prices are rising sharply and fears that an increasing number of companies will not be able to repay their debts.
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“The fragility of the eurozone’s real estate markets continues to increase,” the ECB warns in a semi-annual report on financial stability. She notes that real estate prices rose 9.6 percent year over year in the fourth quarter of 2021. That is the largest increase in 20 years. In addition, mortgage loans are rising rapidly.
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The ECB estimates that the overvaluation of residential real estate in the eurozone has increased to an average of almost 15 percent. “That overvaluation makes some markets vulnerable to a correction. An abrupt rise in real interest rates could lead to corrections in house prices.’ The report does not provide figures on overvaluation by country. The National Bank estimated the overvaluation in Belgium at 20.8 percent in February, but used a different methodology.
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The Russian invasion of Ukraine has increased risks to financial stability.
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The ECB report notes that the Russian invasion of Ukraine has increased risks to financial stability in the eurozone. Energy and commodity prices and inflation prospects have risen and growth prospects have declined. “The war is having an impact on almost all aspects of economic activity and financing conditions,” said ECB Vice-President Luis de Guindos in the foreword.
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‘Orderly’ market response
Markets have responded to the war in an “orderly” fashion, but commodity and energy prices remain high and volatile, the ECB says. The central bank warns against over-optimism. “Some assets remain vulnerable to further corrections if the growth outlook weakens further and/or inflation turns out significantly higher than expected.”
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The ECB fears that some companies that have not yet fully recovered from the pandemic will not be able to repay their debts.
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The ECB fears that rising input prices and a bleaker economic outlook are causing financial difficulties for some non-financial companies. “That could lead to more defaults, especially from companies and sectors that had not yet fully recovered from the pandemic.” The report refers to aviation and the hospitality industry.
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The risk that some companies and households will not be able to repay their loans is worsening the profit outlook for banks. But the ECB is not very concerned about the health of the banks for the time being. She says most banks do not have significant exposure to Russia and Ukraine and that the banks are resilient enough to withstand a “very negative economic scenario.”
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