FRANKFURT, May 31 (Reuters) – Home prices in the euro zone may 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 on Wednesday.
It was one of several risks flagged in the ECB’s Financial Stability Review (FSR, 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 in a bid to fight inflation, and looksset to continue doing so in coming months.
But 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 indicates that Portugal, Spain and the Baltic countries are among those where the proportion of mortgages with a floating rate is highest.
The ECB also warned 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investors have taken large positions in the residential real estate market could take a bigger hit if capital is withdrawn.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 labour market, meaning fewer people were likely to stop paying back their mortgage due to unemployment.