While the European Central Bank (ECB) welcomed the economic recovery in its Financial Stability Review, it also expressed concern about the sharp rise in property prices in the eurozone. Here's a closer look at this surge, and some explanations.
Economic recovery and new threats
" The recent economic recovery in the eurozone has also led to a pick-up in business activity, which has reduced many of our worst fears about economic scarring and rising credit risk," said Luis de Guindos, vice-president of the European Central Bank, introducing the institution's financial stability review.
While concerns about defaults and bank losses have eased, and some risks have diminished despite the disappearance of a number of public aids, " the risks associated with the pandemic have not completely disappeared ", added Luis de Guindos.
Among the new threats that have emerged in the wake of the health crisis, the ECB Vice-President cites " global supply chain pressures and rising energy prices", as well as soaring property prices.
Tighter mortgage conditions
According to the ECB report, residential property prices in the eurozone rose by 7.3% in the second quarter of 2021, the fastest growth seen since 2005.
As a result of various confinements and the spread of telecommuting, demand for larger homes has increased. Yet, " despite the upturn in residential construction, labor shortages, global supply chain bottlenecks and input price rises are weighing on the construction sector's ability to increase housing supply, putting upward pressure on house prices," notes the ECB.
The report points to " a gradual deterioration in lending standards ". Conditions for granting home loans have indeed tightened, and the restrictive nature of the new standards issued in France by the Haut Conseil de Stabilité Financière (HCSF), effective from January 2022, will also have an impact on credit production.
Until now, banks were instructed not to grant loans for terms of more than 25 years, and only to accept applications where the debt ratio did not exceed 35%. From next year onwards, banks will not only be encouraged, but obliged to comply with these new rules.
What's more, it's now very difficult to get a mortgage without a down payment. In Paris, due to high property prices, it's virtually impossible: if banks commit to financing the project up to 110%, they have to commit an additional 40,000 to 50,000 euros, which most of them refuse to do.
Obtaining a loan without a down payment is still possible in certain predominantly rural regions, where loan amounts and borrower incomes are often lower. Generally speaking, only the best borrowers, with attractive assets or high incomes, can still borrow easily without a down payment.