In a thematic note published on Monday, 10 October, the European Banking Authority (EBA) warned that the current economic situation in the European Union, marked by a rise in interest rates and a risk of recession caused by the Russian invasion of Ukraine, is having a negative impact on the real estate sector, which is emerging from a decade of overheating.
European banks hold €4.1 trillion of outstanding mortgage loans, that being one third of all loans granted to households and non-financial companies.
“Given the materiality of the mortgage portfolio for EU banks, an abrupt decline in house prices combined with an increase in default rates could well become a challenge for EU banks”, notes the EBA.
Nevertheless, the European authority cites several factors that could cushion the impact of a potential decline in house prices on the soundness of the banking sector. Since the 2008 financial crisis, banks have applied stricter lending standards, the average ratio of loan amount to property value has been lower, and fixed-rate mortgage contracts have protected borrowers from the rise in interest rates.
The EBA recommends that supervisors and banks carefully monitor developments in the residential real estate market while detecting early on loans that may become non-performing and making adequate provision against potential losses.
See the EBA’s report: https://aeur.eu/f/3j2 (Original version in French by Mathieu Bion)