The ECB sees heightened threat of housing bubble collapsing.

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The euro zone housing market is heating up, raising the risk of a correction in both the residential and commercial divisions, according to a research released by the European Central Bank on Wednesday.

Demand for property is on the upswing, with families saving during the epidemic and increasingly working from home, boosting house price growth to above 7%, the quickest rate since 2005. “Risks of price corrections over the medium term have increased substantially amid rising estimates of house price overvaluations,” the ECB said in a biannual stability report.

Construction is falling short of demand, and the residential market in Germany, France, and the Netherlands is particularly hot. “Despite the recovery in residential construction, labour shortages, global supply chain bottlenecks and input price increases are weighing on the construction sector’s ability to expand housing supply, which is putting upward pressure on house prices,” the ECB said.

While the prime commercial real estate market is now recovering, the outlook is “particularly poor” for lower-quality commercial real estate as remote working, health concerns and the rush for greener property are channeling demand towards the prime segment, the report said.

On a more optimistic note, the ECB stated that the possibility of a surge in company bankruptcies, which was a key concern a year ago, has decreased, notwithstanding the removal of several government assistance programmes.

“On average, corporate defaults have come in lower than the most optimistic expectations earlier in the pandemic while insolvencies have remained around 15% below pre-pandemic levels,” the ECB said.

Story by : Norvisi Mawunyegah