Eurozone Housing Price Growth Rate to Decline Again Next Year... Low Likelihood of Financial Instability

BOK, '2023 Euro Area Economic Outlook' Report

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] The Bank of Korea forecasted that the decline in housing price growth rates in the Euro area is expected to continue when comprehensively considering the future supply and demand conditions of the Euro area's housing market. It also analyzed that even if the Euro area's housing market undergoes an adjustment process, the likelihood of financial market instability is not high.

In the report titled "2023 Euro Area Economic Outlook and Key Issues," published in the Overseas Economic Focus on the 25th, the Bank of Korea stated, "Amid expectations of a significant slowdown in the Euro area's economic growth rate next year, the purchasing power for housing is shrinking due to sluggish income, and consequently, real estate revaluation may lead to stricter credit standards for banks' housing-related loans."

In particular, the Euro area in 2023 is expected to experience a mild economic recession due to the continued impact of high inflation, contraction in household consumption, and corporate investment. The European Central Bank (ECB) projected a growth rate of 0.5% for next year, with the Organisation for Economic Co-operation and Development (OECD) at 0.5%, the European Union (EU) Commission at 0.3%, and the International Monetary Fund (IMF) at 0.5%. The EU Commission predicted that the Euro area will not recover to the pre-pandemic growth trend level by the end of 2024.

The Bank of Korea anticipated that the decline in the Euro area's housing price growth rate will continue. On the supply side, a significant number of new homes are expected to be supplied as the large volume of residential building permits issued since last year enters full-scale completion. However, since the increase in building permits occurred during the recovery from the pandemic-induced slump, it is not expected to lead to long-term oversupply.

Furthermore, even if the Euro area's housing market undergoes an adjustment process, the possibility of financial market instability is considered low. Although the European Central Bank (ECB) has planned additional monetary tightening, factors such as the bank-centered housing finance market and fixed-rate loan structures act to mitigate the impact of rising interest rates.

The report stated, "In the Euro area, housing purchase and construction funds are supplied mainly through conservative bank-centered lending assessments, making the market less vulnerable to changes in housing market conditions compared to investment-type housing finance methods by non-bank financial institutions," adding, "Since the proportion of variable-rate loans among housing purchase loans is only around 20%, the impact of rising interest rates may spread gradually with a time lag."

It continued, "Compared to other advanced countries, the relatively healthy household debt levels and macroprudential conditions also serve as buffers," noting, "The debt-to-income ratio of Euro area households is lower than that of most advanced countries such as Switzerland, Canada, and the United Kingdom."

This content was produced with the assistance of AI translation services.