A pedestrian inspects listings of residential properties for sale in Stockholm, Sweden.
Bloomberg | Bloomberg | Getty Images
STOCKHOLM, Sweden – The International Monetary Fund on Friday warned of “disorderly” home 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 real estate markets, but that this decline could accelerate if central banks continue to raise interest rates.
“There could be disorderly corrections in housing markets even if a broader financial distress is avoided. In some European countries, such as the Czech Republic, Denmark, as well as Sweden, where property prices have fallen by more than 6%, a correction in the property market is already underway,” the fund said.
“The fall in property prices could accelerate as markets reassess inflation risks and financial conditions tighten more than expected. These price declines would adversely affect household and bank balance sheets,” the IMF added.
Mortgage payments could also rise as central banks raise interest rates to lower inflation. As a result, mortgage holders may have less disposable income and, in some cases, may even reach a point where they are unable to repay their loans. Banks could also struggle in a no-repayment environment.
“Empirical models linking house prices to their fundamental drivers suggest overvaluation of 15-20% in most European countries. As a result, house prices have recently fallen in many markets as mortgage rates are still rising and real incomes are being hurt by inflation. ‘ the fund said.
Data from the European statistical office Eurostat shows that house prices have fallen for the first time since 2015. Across the European Union, house prices fell by 1.5% in the fourth quarter of 2022 compared to the previous three-month period.
“General real estate price problems are not only pervasive in highly indebted countries and need to be addressed with oversight. They have to be addressed with stress tests, they have to be monitored very closely,” Alfred Kammer, director of the European Department at the IMF, told CNBC in Sweden.
At the same time, estimates point to further inflation challenges. The IMF expects headline inflation in the euro zone to average 5.3% this year and 2.9% next year – above the European Central Bank’s 2% target.
“The ECB needs to raise interest rates relatively early and keep them going until at least mid-2024. We expect to return to the 2% inflation target sometime in 2025,” Kammer told CNBC.
The European Central Bank is due to meet next week and one of its members recently indicated that a 50 basis point hike is not off the table. The central bank embarked on a hiking path in July 2022 when it cut its policy rate from -0.5% to 0%. The key interest rate of the ECB is currently 3%.
The latest inflation figures in the euro zone showed that interest rates fell to 6.9% in March from 8.5% in February. Core inflation, which excludes energy and food costs, edged up slightly over the same period.
“Further tightening is needed and once the terminal rate is reached then that terminal rate will need to be maintained for longer as core inflation (…) is high and very stubborn. And there is nothing worse than halting an inflationary war than trying to stop effort too soon or abandoning it too soon because the cost to the economy is much higher if you try it a second time,” Kammer said.
In Sweden, where house prices have fallen significantly over the past year, inflation expectations also suggest that the central bank has more leeway with regard to rising interest rates. According to the latest figures from the IMF, headline inflation will be 6.8% this year and 2.3% next year.
The picture is also similar in the UK, where headline inflation is expected to reach 6.8% this year and 3% in 2023.
Amidst these forecasts, the IMF indicated that central banks have no choice but to press ahead with further rate hikes.
“High and possibly longer-than-expected underlying inflation requires tight monetary policy until core inflation is clearly on track back towards central bank inflation targets,” the fund said.
Comments are closed.