Eurozone on alert for new financial crash – echoes of 2008 as ECB triggers alarm over hous

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The head of the ECB banking supervision, Andrea Enria said there has been “an increase in vulnerabilities” in some countries’ residential real estate. The combination of the COVID-19 pandemic, and an increase in cheap loans, have overheated the real estate market in many places, leading to an increased risk of a “bubble”.

A real estate bubble is a strong and persistent deviation of the price level from fundamental data – like income, economic growth and population migration.

A bubble is characterised by temporary periods of high demand, low supply and inflated prices, which creates instability in the housing market – and the economy as a whole.

Speaking in the Economic Committee of the European Parliament on Wednesday, Mr Enria said that, while the number of non-performing loans is still manageable, the quality of the underlying assets appears to be deteriorating.

He also said that banks’ forecasts for bad loans might be overly optimistic.

A real estate bubble is a strong and persistent deviation of the price level from fundamental data – like income, economic growth and population migration.

A bubble is characterised by temporary periods of high demand, low supply and inflated prices, which creates instability in the housing market – and the economy as a whole.

Speaking in the Economic Committee of the European Parliament on Wednesday, Mr Enria said that, while the number of non-performing loans is still manageable, the quality of the underlying assets appears to be deteriorating.

He also said that banks’ forecasts for bad loans might be overly optimistic.

READ MORE: Eurozone panic: Brussels terrified as inflation sparks meltdown fears

According to UBS, the reason for the steadily rising real estate prices can be attributed to the growing availability of cheap loans.

The number of outstanding mortgages has also increased at a growing pace almost everywhere in recent years.

A tightening of the lending standards could therefore stop the price boom abruptly, the bank said.

But according to UBS, the COVID-19 pandemic also had a large part to play in this.

During lockdowns, living in larger cities became less attractive, meaning that economic activity shifted towards less populated regions and away from urban areas, causing a remarkable trend reversal in the housing market.

From mid-2020 to mid-2021, property prices rose faster in non-urban areas than in cities for the first time since the early 1990s.

Claudio Saputelli, the board member responsible for real estate at UBS said: “The corona pandemic has pushed many people back into their own four walls.

“This increased the importance of living space and resulted in a greater willingness to pay higher prices for residential property.”

The financing conditions have also improved, with higher savings rates and booming stock markets having released additional equity.

According to the bank, house prices rose in all of the cities analysed, with four exceptions: Milan, Paris, New York and San Francisco.

Five cities recorded double-digit price growth: Moscow, Stockholm and the Pacific cities of Sydney, Tokyo and Vancouver.

Their report shows that inflation-adjusted price growth for residential properties accelerated to an average of six percent from mid-2020 to mid-2021 – the highest price increase since 2014.

Additional reporting by Monika Pallenberg.



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