The International Monetary Fund (IMF) on Friday warned of “disorderly” house price corrections in Europe, at a time when the region is struggling to bring down inflation.
In its latest regional economic outlook for Europe, the IMF said that a downward correction is already underway in some European housing markets.
However, it was also quick to warn that this decline could accelerate as central banks increase interest rates further.
The director of the European Department at the IMF, Alfred Kammer, said these issues should be tackled with stress tests and watched very carefully.
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“Disorderly corrections in real estate markets could occur even if broader financial distress is avoided.
“Housing market correction is already underway in some European countries, for instance, in the where house prices declined more than 6% in 2022,” the Fund said.
“House price declines could accelerate if markets reprice inflation risks and financial conditions tighten more than expected.
“These price declines would have adverse effects on household and bank balance sheets,” the IMF added.
Rising Mortgage Payments
Mortgage payments might go up as well, as central banks increase interest rates in efforts to reduce inflation levels.
Consequently, mortgage holders may have less disposable income to spend, and, in some cases, could even reach a point where they are unable to repay their credits.
“Banks could also struggle in an environment where repayments are not made.
“Empirical models linking house prices to their fundamental drivers point to an overvaluation of 15–20% in most European countries.
“Therefore, with mortgage rates still on the rise and real incomes dented by inflation, house prices have been declining recently in many markets,” Krammer said.
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Data from Europe’s statistics office Eurostat showed house prices dropping for the first time since 2015.
Across the European Union, house prices fell 1.5% in the fourth quarter of 2022 from the previous three-month period.
“General house price issues are across the board, not just in high debt countries, and they need to be tackled with supervision.”
