The European Central Bank (ECB) has warned of the overvaluation of many assets caused by ultra-low rates and a generous program of economic incentives.
According to the semi-annual stability report, there are problematic areas in the real estate and financial markets, and risk-taking by non-banking organizations and the growth of sovereign and corporate debt are intensifying.
As for the real estate market, the risks of price adjustments in the medium term have increased significantly because of inflated prices for housing.
According to the ECB, the growth of real estate prices in Europe was higher than predicted.. During the pandemic, people began to invest massively in housing, which provoked high demand and rapid price growth. This has increased the problem of buying real estate for people with low incomes, as the real increase in the cost of buying square meters in Europe turned out to be much higher than expected.
By the way, if we consider Cyprus, today the problem of a shortage of housing options in the average price range is obvious. And the prices for new projects have increased significantly.
Households that have taken out a floating-rate mortgage or a short-term fixed-rate mortgage are at risk of experiencing an unexpected interest rate increase that could negatively affect their ability to service debt, the report says.
ECB Vice President Luis de Guindos also highlighted the "amazing buoyancy" of equity and risky asset markets, "which makes them more susceptible to adjustments."
'There are examples of well-known market participants who are experiencing new and more exotic forms of investment. In parallel, the eurozone real estate market is expanding rapidly, and there is no evidence that lending standards are somehow tightening in response' — he wrote in the report.
As you may know, in September, the central bank announced that it would begin the process of slowly winding down its huge package of pandemic-era incentives.
ECB head Christine Lagarde stressed that this is not a "reduction", but a "recalibration", because the regulator still believes that inflation will decline next year.
In September, inflation in the eurozone reached a record 3.4% in 13 years. In October, amid rising energy prices, inflation again broke a 13-year record and reached 4.1%. Some market participants believe that the ECB underestimates inflationary pressures, and it will probably have to announce a rate hike by early 2023. In the money markets, the price has already taken into account the probability of a rate increase by 20 basis points in December 2022.
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