Real estate prices have risen sharply in recent years. The time for regulatory intervention may have come.
A sharp rise in property prices
The rating agency Scope made it clear in a press release on April 23 that house prices in Europe rose faster than ever in 2020. The average increase over the past ten years has therefore been six percent, which is twice the annual rate of the past decade.
According to Scope, there is increased pressure on the affordability and profitability of living space, as household incomes and rents have only increased slightly.
“Since the key economic data only partially justify the price increase, the sustainability of these growth rates is questionable,” says Mathias Pleissner, head of Scope’s covered bonds team.
The reason for the high real estate prices
But why have real estate prices increased so significantly? According to the research and consulting institute empirica, real estate is more expensive the more popular it is. Desire increases with increasing scarcity and attractiveness. The combination of the internal migration to the metropolitan areas and the attractiveness of real estate as an investment cause real estate prices to skyrocket.
In particular, the slowdown in construction activity during the pandemic and high-income buyers who have so far been spared the loss of income can accelerate this trend even further.
High demand and hardly any offers
According to Scope, the European Commission’s requirement to renovate 35 million European buildings by 2030 can lead to a further displacement of new construction activities.
“The capacities of construction companies are limited. This could further hinder the supply of new housing, ”said Reber Acar, senior analyst on the covered bonds team.
On the demand side are the increased savings people make due to fewer consumer purchases in pandemic times. According to Scope, a greater benefit can be seen in owning a property by working more from home.
The necessary moderation of the real estate market
In its press release, the rating agency makes it clear that real estate prices in many European countries had already reached their sustainable limit before the pandemic. Although loose regulatory measures and a persistently low interest rate environment are helpful for the economy, this can also have unintended consequences for the European real estate market. For example, growth can increase beyond the sustainable level.
Since the current house price growth is close to ten percent, moderation should be considered. According to Scope, increasing bankruptcies and unemployment, for example, have the potential to reduce real estate growth rates. State influences can also serve as regulatory instruments.
In addition, one has to take a look at the banks and borrowers. Loans remain cheap, but building is becoming more and more expensive due to the high demand.
According to Scope, so far only a few banks have changed their lending criteria. In most countries, the regulatory measures have even been reduced.
“Therefore, this could be the right time for regulators to be proactive, otherwise banks and borrowers could be caught on the wrong foot if the tide turns,” continued Pleissner.
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