Was the ECB “too pessimistic” previously or is it not pessimistic enough now?

According to a news report in the Financial Times, based on a recent European Central Bank warning, house prices across the eurozone look set for a correction. This arguably-overdue correction (if it happens) is being linked to growing inflation and rising interest rates. 

This European news comes in the same week as ERSI statistics reveal 54 percent of all renting households are in receipt of State support. This marks a doubling in households in need of financial assistance from the government to need their basic housing needs over the past 30 years. Also, the Examiner has reported that estate agencies across Munster are listing new rental properties for one hour only, as they cannot deal with the volume of demand enquiries. In fact, one Cork apartment – listed for €2,750 per month – attracted more than 1,000 enquiries in that time. The most recent CSO data shows Irish property prices have increased more than 15 percent year-on-year. 

The above European market comments emerged after the ECB’s most recent twice-yearly financial stability review and this review paints a picture of lower growth, likelihood of defaults, higher inflation and rising borrowing costs as a result of Russia’s invasion of Ukraine. According to the FT piece “asset prices could fall further if economic growth continues to weaken or inflation rises faster than expected…[and] a sharp increase in rates could cause a reversal  in eurozone house prices, which it estimated were already about 15 per cent overvalued, when weighed against overall economic output and rents”. Against the backdrop of this, the Central Bank is set to raise deposit rates later this summer for the first time in a decade and “markets expect four quarter-point rises this year, which it said could challenge the valuations of riskier assets, such as equities”.The vice-president of the ECB admitted they had been “too pessimistic” in their 2020 warning that the fallout from the pandemic could cause a €1.4 trillion increase in non-performing loans for banks, however, he noted that inflation and a higher cost of borrowings could cause companies that have already been weakened during the pandemic to slide into default. 

From an Irish market perspective, the European Commission this week declared there is a limited risk of a new housing bubble developing in Ireland due to stricter rules that have reduced risk in the financial system.

Finally, as expected, the Oireachtas Joint Committee on Housing’s report has recommended a tax on vacant homes, which the Government has indicated will be introduced in Budget 2023. This is not a surprise, it was a key proposal in Housing for All, and it will be genuinely interesting to see if this measure brings the promised 140,000 properties back into use. We are not entirely convinced…

Ian Lawlor
086 3625482

Managing Director 
Lotus Investment Group