The euro area housing market is warming up, increasing the likelihood of a correction in both residential and commercial real estate markets. This was stated by the European Central Bank in its stability report.
Families make savings during a pandemic, and people increasingly work from home. This increases demand for real estate and real estate price growth has exceeded seven percent, the highest figure since 2005.
“The risks to price corrections over the medium term have increased significantly in line with rising real estate price overvaluation estimates,” the ECB said in a half-yearly report. In particular, households with variable rate mortgages or shorter interest rate fixation periods on their mortgages are at risk of an unexpected rise in interest rates, which could negatively affect their ability to repay debt.
Construction is unable to keep pace with demand, and the housing market is especially hot in countries like Germany, France and the Netherlands.
“Despite the recovery in housing, labor shortages, supply chain constraints and rising input prices are having an impact on the construction sector’s ability to expand its housing supply, putting upward pressure on property prices,” the ECB added.
While the quality commercial real estate market is now recovering, the outlook for lower quality commercial real estate is poor, as work from home, health concerns and the drive for greener real estate are driving demand for quality real estate.
The positive news is that the risk of a sharp rise in corporate bankruptcies, which was a major concern last year, has eased, although some government support measures have been lifted. “On average, corporate insolvency has fallen below the most optimistic expectations at the start of the pandemic, and insolvency rates have remained around 15 percent below pre-pandemic levels,” the ECB added.