A global real estate bubble was brewing, and regulators are only now catching onto why it’s an issue. This week notes from the General Board of the European Systemic Risk Board (ESRB) annual meeting were released. The notes reveal members are concerned that inflated home prices present a systemic risk to the EU economy. Steep valuations and weak demand have the Board concerned that prices will begin falling soon, and it’s a long way down to fundamentals.
The EU’s Financial Watchdog Sees Housing As A Systemic Risk
The General Board recently discussed the systemic risk that could result from a home price correction. “Members saw increasing evidence that the real estate cycle in several EU countries might be reaching a turning point because of the pronounced rise in mortgage lending rates since the beginning of the year and the deterioration in the macroeconomic outlook,” explained the ESRB.
Steep prices and rising financing costs have households hitting the pause button on housing. The Board cited falling transactions, and household survey responses that show falling intentions to buy or build a home. “[this]… suggested that the probability of prices declining in the near future was rising,” the Board warns.
EU Real Estate Markets Are Overvalued By Up To 90%
How overvalued is EU real estate? It depends on the model and country, but the Board separately provided range data. At the high end of overvaluation is Luxembourg, which their model shows can be up to 90% overvalued. Even their more elaborate demand-based model pegs the country at nearly 40% overvalued, which is a high “conservative” estimate for any market.
EU Over/Undervaluation of Residential Real Estate
The over/undervaluation of national residential real estate markets across the EU.
Source: European Systemic Risk Board.
Larger EU economies with significant overvaluations are likely to present the biggest risks. The most concerning overvaluations in the group are Germany (~15-50%), France (~10-30%), Netherlands (~15-30%), and Sweden (~25-70%). Since these countries also represent significant economies when it comes to output, the issue of overleveraged households is compounded for the whole region.
The global cheap credit bubble is quickly unwinding, and it seems like regulators everywhere are concerned. That’s a good start, since it means they’re looking for ways to address the issue. However, the detachment is so large, and the growth so rapid it’ll be difficult to unwind home price inflation without any losers. Either inflated prices are maintained, meaning first-time buyers will have to sacrifice consumption, and the economic benefits to leverage up, or real estate owners will have to take a substantial loss.