Inflation, the threat of an economic downturn and rising interest rates are causing the European Central Bank (ECB) to worry: it is warning of risks for households and companies, problems at banks and, above all, turbulence on the housing market.

Significantly, an example from Great Britain currently best illustrates the risks of which the European Central Bank (ECB) is also warning for the EU and the euro zone: the approximately two-thirds of Britons who own their apartment or house themselves only have the interest on their mortgage on average fixed at around three and a half years. The rising interest rates are quickly making the monthly expenses of a large part of the population more expensive. For some, the mortgage may become too expensive, which could bring more homes onto the market and put pressure on prices. At the same time, people who already own a property do not currently want to buy a new one because they would then have to give up their low-interest loans.

The danger: More supply and less demand create a dangerous downward pull on the housing market. Prices are falling, the risk of payment defaults is increasing for the banks, and in the worst case there is a risk of a financial and real estate crisis.

In the interwoven European financial and real estate markets, a crisis in Great Britain would also be a burden for Germany. Above all, the example from the island shows how widespread the risks are that the ECB warns about in its financial stability report for Germany and the rest of Europe. Bloated, sometimes completely inflated real estate prices, rising interest rates and high inflation increase the risk of panic selling, says the central bank.

“The short-term downside risks for residential property prices have increased significantly,” writes the ECB in the report. Residential property prices have already fallen in some countries. A correction is threatened, especially in areas where prices have recently risen sharply.

In the midst of the Dax autumn rally, falling energy prices and high profits at banks and many Dax companies, the ECB’s report is strengthening pessimism for the coming years.

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The causes of these risks are similar in all countries, but are colored locally. Take Sweden as an example: As the Frankfurter Allgemeine Zeitung reports, the real estate sector there will have to repay a good ten billion euros in debt in 2023, and even around 42 billion euros by 2026. High sums, for the refinancing of which companies will soon be paying significantly more interest than before.

The consequences are the same as in England, but emanate from the companies: the real estate companies are overwhelmed by the payments, and they have to raise money by issuing shares or selling real estate. In the first case, Sweden is threatened with a tremor, in the second the housing market comes under pressure.

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“Falling property values ​​could have a domino effect,” Anders Kvist, a senior adviser to the director of the Swedish FSA, told the FAZ: “When property values ​​fall, the collateral available for the loan decreases. This can lead to more collateral being asked for, which in turn forces distress sales.” This can also cause a downward pull on the housing market.

A horror scenario for Sweden: two thirds of the credit volume in the country is accounted for by real estate loans. In the rest of Europe it is usually only around a third. Home loan problems are hitting Sweden and Swedish banks hard.

Funds that invest in real estate are also feeling the effects of the crisis throughout Europe. Although according to the ECB the total assets of funds with largely non-short-term investments have recently increased enormously, their cash holdings have declined. If many investors are now withdrawing their money due to inflation and the crisis, the funds’ cash reserves are not sufficient to pay out all sellers.

The funds have to raise money by selling houses hastily, and therefore often below the market price. That eats away at their returns, causing more investors to sell shares and potentially starting a downward spiral. Many distress sales also lower real estate prices, making sales less profitable. This can also cause a crash.

Although the banks have recently made a lot of money from the rise in interest rates, they are now threatened with loan defaults by overburdened property owners and energy-intensive companies. The ECB writes that cyber attacks and low cost efficiency are an additional burden on financial institutions.

If the banks actually default on loans due to the risks mentioned, this initially only leads to losses for the bank. The ECB believes that payment defaults are sufficiently limited so that no money house gets into trouble. But in countries where many low-income people, who are hit particularly hard by inflation, own homes, some banks could default on critical loans, the central bank warns. If this happens, Europe’s entire financial system will be at risk.

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Should the risks mentioned by the ECB actually put the housing market under pressure, central banks have countermeasures: They can grant homeowners payment deferrals, replace defaulted bank loans or nationalize ailing institutions. So investors don’t have to fear the collapse of the European real estate market. In the worst case, however, the EU and the ECB will face expensive problems that they can only solve with the next mega-bailout packages.