Home prices in the eurozone might be headed for a “disorderly” decline, as high mortgage rates make purchases unaffordable for households and unattractive for investors, the European Central Bank (ECB) said yesterday.
It was one of several risks flagged in the ECB’s Financial Stability Review, along with higher borrowing costs and slower growth hurting companies and households and, in turn, casting a shadow on traditional lenders and shadow banks.
The ECB has been raising interest rates from record lows since July last year in a bid to fight inflation, and looks set to continue doing so in coming months.
Photo: AFP
However, the impact of the steepest increase in decades is only beginning to be felt by the property market, which has boomed over a decade of easy credit.
“Looking ahead, a fall in prices could become disorderly as rising interest rates on new mortgage lending increasingly compromise affordability and increase the interest burden on existing mortgages, especially in countries where variable rate mortgages predominate,” the ECB said.
It did not list those countries, but ECB data showed that Portugal, Spain and the Baltic countries are among those where the proportion of mortgages with a floating rate is highest.
The ECB also said that regions, where institutional investors have taken large positions in the residential real-estate market, could take a bigger hit if capital is withdrawn.
These included Berlin, parts of western Germany, and some capitals like Paris, Madrid, Lisbon and Dublin.
On the upside, the ECB said households were benefiting from a strong labor market, meaning fewer people were likely to stop paying back their mortgages due to unemployment.
Eurozone inflation stood at 7 percent in April, still well above the ECB’s 2 percent target.
Another rate hike is expected this month.
Meanwhile, French inflation cooled more than expected last month to its lowest level in a year, as energy and food price increases moderated, preliminary official data showed yesterday.
Consumer prices dipped 0.1 percent over one month, giving an annual inflation of 6.0 percent after 6.9 percent in April, EU-harmonized data from the INSEE statistics agency showed.
That was the lowest since May last year and fell short of an average expectation for a reading of 6.4 percent in a Reuters poll of 17 economists.
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