The European Central Bank (ECB) said in a financial stability report released on the 25th that if the rate of increase in mortgage rates exceeds the inflation rate, the expensive housing market in the euro area could fall. He pointed out that there is a possibility, and said that a debt-led bubble will be exposed in some countries.
He also warned that asset prices would fall further if the economic outlook deteriorated as a result of the Ukrainian war and inflation was significantly higher than expected.
Based on the relationship between home prices and income, the ECB analyzes that home prices in the euro area are on average close to 15% and in some countries up to 60% overvalued.
For every 10 basis points (bp) rise in mortgage rates after inflation adjustments, home prices could fall 0.83-1.17%, he said.
“A sudden rise in real interest rates could lead to short-term home price adjustments. Current low interest rates are likely to cause a significant home price reversal,” he said.
By country, both home prices and mortgages are growing sharply in Slovakia, Estonia and Lithuania. The Netherlands, Cyprus and Greece have particularly high household debt as a percentage of gross domestic product (GDP).