empty
25.11.2021 11:34 PM
Central banks around the world are seriously concerned about overvalued real estate

The higher the inflation, the more anxious the central banks are about bubbles in the local real estate markets. The central banks of Ireland and Germany are planning stricter regulation of commercial real estate funds.

Central banks around the world are seriously concerned about overvalued real estate

The reason for the decision of the Central Bank of Ireland is the fear that the shift in prices in the real estate market may intensify in the economy during the recession. In turn, this may lead to a repeat of the scenario of 2008, when the bankruptcy of the mortgage bank Lehman led to a global crisis.

The bank's management is alarmed by the extremely unfavorable situation with Evergrande, a Chinese mortgage bank that has been teetering on the verge of bankruptcy for several months.

As a result, the Irish central bank is currently "advising on a set of measures to limit leverage and liquidity mismatch" for property funds, "which in recent years have become increasingly linked to the domestic economy," central bank governor Gabriel Makhlouf told reporters on Thursday.

"The leverage of Irish real estate funds is higher than that of European comparable funds, which creates additional vulnerability to falling prices, which can lead to selling pressure in the market," he said.

The set of recommendations will include proposals for the introduction of leverage limits and instructions on notification periods for real estate funds "investing more than 50% directly or indirectly in Irish real estate," the central bank said in a report published on Thursday.

According to the proposal, the central bank can temporarily lift the limit in case of a downturn in the market and tighten it in case of a "growing recovery" in the sector.

The central bank has made it clear since at least February that it is concerned about the level of leverage of some real estate funds and has since repeated these concerns repeatedly. It will accept applications according to the planned rules until February 2022.

But even in the eurozone, not everything is going well with real estate loans.

Echoing the Central Bank of Ireland, the Bundesbank is preparing for "rainy days".

"German banks are becoming increasingly vulnerable to a real estate market revaluation, and financial authorities should force lenders to increase capital reserves," Germany's main financial regulator said in a report on Thursday.

Germany reduced the so-called countercyclical buffer for banks to zero at the beginning of the pandemic, but currently economic growth is steady and bank lending has gained momentum, so they should be forced to hold more capital.

The Bundesbank added that the buffer, now 0, was set at 0.25% of banks' total exposure to risk before the pandemic, but current lending levels suggest an even higher level may be needed.

To date, this buffer clearly does not take into account the rapidly developing residential real estate market, which requires careful monitoring and possible actions by regulatory authorities, said Claudia Buch, Vice President of the Bundesbank.

Real estate prices around the world continue to rise. The growth rates make experts think that, perhaps, investors are now considering real estate not only as a profitable investment due to low interest rates of lending, but also as a fairly safe haven for the period of rising inflation.

Indeed, as we have already said, interest rates will not always be low, and the potential benefits of buying real estate at an inflated price are questionable. However, the need to invest makes real estate attractive.

Therefore, sector indicators indicate that further growth is expected ahead of housing prices, as a result of which real estate will be overvalued, since the growth of prices and rents outstrips income growth.

"The price peaks in the residential real estate market tend to grow further," the Buch said. "According to the Bundesbank estimates, in 2022 in Germany they will be from 10% to 30%."

This means that banks may overestimate the cost of securing a loan, exposing them to large losses in the event of a price adjustment.

Banks are also vulnerable to rising interest rates because most of their long-term lending is provided at fixed rates, especially in the case of mortgages, the Bundesbank added.

This really creates the prerequisites for a repeat of the 2008 scenario, since a drop in the value of mortgaged housing by only 1-2% can bring down the economy. Given the bubble in the real estate market, this is not such an incredible scenario. Although with the normalization of inflation to 2-3%, prices, indeed, will only grow over time. And again they will sink only with virtually zero increase in producers' incomes, which will mean a decrease in purchasing power in all markets.

Egor Danilov,
Analytical expert of InstaForex
© 2007-2025
Select timeframe
5
min
15
min
30
min
1
hour
4
hours
1
day
1
week
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST

Recommended Stories

The Dollar Is No Longer King. What You Need to Know

Historically, the U.S. dollar has been the primary safe haven during crises such as wars, sanctions, and banking shocks; investors tend to flock to the dollar as their ultimate safety

Anna Zotova 00:59 2025-05-21 UTC+2

US Market News Digest for May 20

Despite the downgrade of the US credit rating and rising Treasury yields, retail investors remain active buyers of equities. Net purchases have surged to a record $4 billion, signaling confidence

Ekaterina Kiseleva 12:16 2025-05-20 UTC+2

Market Gains Modestly: Dow +0.32%, Nasdaq +0.02%, but Novavax Soars After Vaccine Approval

Dow Up 0.32%, S&P 500 Up 0.09%, Nasdaq Up 0.02% TXNM Energy Rises After Blackstone Deal Novavax Jumps After FDA Approval of Coronavirus Vaccine European Stocks Rise Slightly, as Utilities

Thomas Frank 11:18 2025-05-20 UTC+2

Bitcoin: What to Expect This Week. BTC Hits $107,000 – Can the Record Hold?

The leading cryptocurrency is fighting to maintain its position, even though it's not always smooth sailing. Currently, BTC is out in front, slightly simplifying the task of holding higher ground

Larisa Kolesnikova 00:40 2025-05-20 UTC+2

US consumption losing steam

In the upcoming week, Wall Street's attention will be focused on earnings reports from the largest US retail chains — crucial indicators of how changing trade conditions are impacting

13:30 2025-05-19 UTC+2

US Market News Digest for May 19

Despite encouraging statements about progress in trade negotiations and high-level diplomatic visits, forecasts for the S&P 500 remain restrained. Analysts point to the index's lack of growth compared

Ekaterina Kiseleva 12:20 2025-05-19 UTC+2

The American consumer is slowing down: What Target, Lowe's and Walmart are saying

Wall Street will be focused on earnings reports from the largest US retailers this week to gauge how changing trade conditions are affecting the economy and whether the recent stock

Thomas Frank 10:35 2025-05-19 UTC+2

US Market News Digest for May 16

Shares of Micron Technology are extending their steady rally, bolstered by encouraging technical signals. Investors are eyeing price targets at 117.34 and 137.12, making the stock attractive in both

Ekaterina Kiseleva 13:20 2025-05-16 UTC+2

STOXX 600 storms the peaks: where is the growth heading and what awaits investors

Cisco rises after raising its forecasts for the financial year UnitedHealth falls on the news that it faces a criminal investigation European STOXX 600 index is set for a fifth

Thomas Frank 11:22 2025-05-16 UTC+2

USD: Weak on the Surface – Strong at the Core. The Game Isn't Over, the Dollar Prepares an Unexpected Move

A new phase is beginning in the currency market, where economic fundamentals and geopolitical strategy shape the U.S. dollar's exchange rate. The U.S. administration is subtly considering the idea

Anna Zotova 00:39 2025-05-16 UTC+2
Can't speak right now?
Ask your question in the chat.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.