European Central Bank Cites Concerns over Rising Risk for Housing Sector

Banking CIO Outlook | Monday, January 11, 2021

Owing to families saving up in the pandemic and the rise in remote working, the demand for property building is heating up.

FREMONT, CA: The European Central Bank stated in a stability report that the chances of a correction in both the residential and commercial segments are increasing as the Eurozone housing market is heating up. The demand for property is rising owing to families building up savings amidst the pandemic and the rise in remote working, which has pushed the house price growth to reach seven percent, which is recorded as the fastest rate since 2005. In a biannual report, the ECB said that the risks of price corrections had increased substantially over the medium term due to rising estimates of house price overvaluation.

The residential market is desirable, especially in countries such as Germany, France, and the Netherlands, and construction cannot keep up with the demand. The ECB added that despite the recovery in residential construction, the increasing input prices, labor shortages, and global supply chain bottlenecks are mulling on the construction sector's ability to extend housing supply, setting upward pressure on house prices. The report also stated that as there is a recovery in the prime commercial real estate market, there is a particularly poor outlook for lower-quality commercial real estate since the rush for the greener property, remote working, and health concerns are driving demand towards the prime segment.

On the contrary to these events, on a positive note, the ECB stated that the risk of a surge in corporate bankruptcies has eased, which was a significant fear a year ago, even as few government measures have now been terminated. The ECB also added that while insolvencies have remained around 15 percent below pre-pandemic levels, on average, corporate defaults have come in lower than the most optimistic expectations earlier in the pandemic.

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