The European property market risks imploding, with negative knock-on effects on banks and the stability of the financial system. This is the warning launched by the European Central Bank (ECB) in an article published on its website. Frankfurt experts call on Eurozone governments to take the necessary countermeasures, albeit not top secretly.
The problem is the vicious circle that the housing and office market has been in for about a year and a half. “Residential real estate” and “commercial real estate” have “entered recession” in mid-2022, the ECB writes. In the first case, after a decade-long rise, in the second case, after a brief post-pandemic recovery. High interest rates, which increased mortgage costs for families and businesses, ultimately reduced sales and lowered prices.
It is worth saying that in many cases the decline in prices helped offset the overvaluation of properties that occurred in many European cities during the period of low interest rates. This may reduce demand-side risks when it comes to residential real estate, but it still remains a concern for banks, which “may be exposed to losses where real estate assets are used as collateral and may increase losses in the event of bankruptcy.”
This criticality is even more evident in the commercial real estate sector. In the first half of 2023, there was a decrease of up to 47 percent in the number of transactions in this sector compared to the first half of 2022. “The performance of real estate companies on more liquid stock markets indicates a serious decline. The ECB stated that the euro zone’s largest shareholders were trading at a discount of more than 30% to their net asset value, the largest discount since 2008.
Frankfurt said banks’ exposures to commercial real estate are “significantly lower” than to residential real estate and “are unlikely to be large enough on their own to cause a systemic crisis at the euro area level.” . But he warns that “a scenario in which real estate companies would suffer large losses would likely overlap with stress in other sectors” and lead to “systemically relevant losses in the banking system”. Additionally, “such a negative outcome would also lead to major losses in other parts of the financial system with significant exposure to commercial real estate, such as mutual funds and insurers”.
For all these reasons, the ECB is demanding that Eurozone governments take action not only to support the residential real estate sector, as has been done so far, but also to encourage actions “targeting the vulnerabilities of the commercial real estate sector”.
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Source: Today IT
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
