Luis de Guindos, vice president of the European Central Bank (ECB), has warned of the change in trend that the real estate market in the Eurozone could face after years of strong growth in prices and mortgage credit. Guindos has recognized that certain changes are being seen (expectations, types and demand) that could lead to a fall in housing prices.
The rate hikes, which have already reached the 2% zone, which in turn is rapidly increasing the cost of granting mortgage loans (such as, of course, the variable one). This dynamic could reduce a demand for housing that has grown, perhaps, disproportionately in recent years, triggering property prices. In the new financial environment, the trend of recent years in real estate seems vulnerable,
The covid crisis, contrary to what was initially thought, had a positive impact on the demand for housing and the price. On the one hand, households increased the value they give to real estate, since housing became an even more relevant good in the face of mobility restrictions.
On the other hand, interest rate cuts and central bank liquidity injections left housing as one of the few assets with a high return (deposits, bonds, etc. offered almost zero return). To all of the above, we must add the savings accumulated by families during the pandemic, which, in part, was channeled as an investment towards the purchase of a home.
Now, all these trends could be reversed. Guindos believes that: “The vulnerabilities in the residential real estate markets of the euro area are also increasing in light of the continuous price increases and the vigorous growth of mortgage loans”, said the Spanish economist, who has also provided data . In the first quarter of 2022, the growth of house prices in the euro zone was 9.8%, .
“However, since the beginning of the year, responses to household surveys on the intention to buy a home have decreased and banks have reduced their expectations on the demand for mortgage loans, which points to a greater potential for correction of the housing prices”, has sentenced the vice-president of the ECB.
Even if there is a correction in housing prices, both families and banks are in a better position than in 2007 to deal with this ‘coup’. Bank balance sheets are stronger than in the past and are not as exposed to real estate lending. While the indebtedness of families, at least in the case of Spain, is much lower than in 2007. So the economy seems to be better prepared to face the possible correction in housing.
More interest rate hikes
On the other hand, Guindos wanted to prioritize interest rate hikes and inflation control during his speech. It seems clear that the tightening of monetary conditions is accelerating the arrival of a new recession, but in a situation like the current one it is more It is important to return inflation to the target (2% per year) and maintain the credibility of the central bank.
The road to normality (reaching the neutral interest rate) is long, however, so the ECB will continue to raise the price of money in the next meetings. Despite last week’s historic rate hike (75 basis points in the three key rates), monetary policy remains accommodative, that is, it still stimulates aggregate demand.
For this reason, Guindos has insisted that “with inflation at record levels, such an accommodative monetary policy stance is no longer appropriate… In this context, we decided at our Governing Council meeting last week. This big step anticipated the transition from a highly accommodative level of policy rates to levels that will ensure the return of inflation to our medium-term target of 2%,” De Guindos assured.
The vice president has wanted to prepare the ground to continue raising interest rates even if a recession occurs. Guindos has insisted on the importance of returning inflation to 2% even in a context of economic slowdown.
“It is true that we are not in a classic episode of demand-driven overheating, and that energy remains the main driver of rising inflation and slowing growth. But with interest rates currently low, the Monetary policy remains accommodative, which supports demand and ultimately also contributes to price pressures.”
“With inflation at record levels, such an accommodative monetary policy stance is no longer appropriate. In addition, we need to ensure that inflation expectations remain well-anchored until the current shocks pass to facilitate a return of inflation to our target of medium term”, says De Guindos.
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