The European Central Bank (ECB) has urged banks in the euro zone to prepare for the possibility of a further drop in property prices as the region faces the highest interest rates in decades. The ECB’s chief supervisor Andrea Enria said that banks should account for these risks in their provisioning practices and capital planning.
Property market under pressure
The European property market has come under pressure from the ECB’s steepest and longest streak of increases in interest rates, which are now at record highs. The ECB has raised its key interest rate by 2.5 percentage points since 2021, reaching 3.75% in October 2023, in an attempt to curb the surge in inflation that has exceeded its target of 2%.
With real estate prices already falling in several countries, most notably Germany, where there had been a boom during the last decade of low interest rates, Enria told lenders to brace for more pain.
“The current higher interest rate environment could put further downward pressure on office and house prices, making it harder for commercial property owners and households to service their debt,” Enria told the European Parliament on Tuesday.
Banks tightening credit conditions
The ECB’s rate hikes have also affected the availability and demand of credit in the euro zone, especially for mortgages. According to the ECB’s latest bank lending survey, banks have tightened their credit standards for loans to households for house purchase in the third quarter of 2023, citing the deterioration of the economic outlook, the increased risk perception and the lower collateral values.
At the same time, the demand for housing loans from households has declined, reflecting the reduced consumer confidence, the lower affordability and the expectations of further price declines.
The ECB’s survey also showed that banks have tightened their credit standards for loans to enterprises, mainly due to the higher cost of funds and the lower risk tolerance. The demand for corporate loans has also decreased, as firms have reduced their fixed investment and working capital needs amid the economic slowdown.
Enria to step down at the end of the year
Enria, an Italian, is set to step down as the chairman of the ECB’s Single Supervisory Board at the end of the year, when he will be replaced by Germany’s Claudia Buch. Enria has been in charge of the ECB’s banking supervision since 2019, overseeing the largest banks in the euro zone.
Under his tenure, the ECB has faced several challenges, such as the impact of the Covid-19 pandemic, the Brexit transition, the rise of fintech and crypto assets, and the implementation of the Basel III reforms. Enria has also advocated for the completion of the banking union and the capital markets union in the EU, as well as for a more harmonized approach to dealing with non-performing loans and bank failures.
