In Europe, the current real estate decline is not causing a financial crisis at the moment.
Same cause, same effect: the very rapid increase in interest rates by the European Central Bank (ECB), from -0.5% to 4% in just over a year, is causing a chill in all European real estate markets, both residential and commercial. Sales in Île-de-France dropped by 25% in the second quarter, building permits in Germany fell by 26% in May compared to 2022… In the first quarter, thirteen out of fourteen European countries covered by Eurostat recorded a decline in real estate transactions.
On Thursday, September 14th, Christine Lagarde, the president of the European Central Bank, almost apologized for this effect, which is a direct consequence of the rate hike she led. “The real estate sector, whether commercial or residential, (…) is strongly reacting to the current circumstances. (…) We are aware of this,” she acknowledges. However, she continues, her mandate as a central banker is to bring inflation back to 2% (which is currently at 5.3% in the eurozone), not to support specific sectors of the economy.
At the moment, no country is truly experiencing a real estate crash. After years of impressive growth, it is rather a correction, more or less serious: -6% expected in the Netherlands in 2023, -6.8% in Germany in the first quarter compared to the previous year, -0.8% in France in the second quarter compared to the first quarter…
Les « banques de l’ombre »
Beyond the financial impact on households, the question for the ECB is whether the price drop can have a contagion effect on the entire financial system. In 2008, the banking panic came from the US real estate market. Fifteen years later, the situation is completely different, according to Luis de Guindos, the Vice President of the ECB, because the numerous banking regulations that have been put in place have greatly strengthened the solidity of financial institutions. Nevertheless, as the person in charge of financial stability issues, he closely monitors the subject. “Commercial real estate had already started to decline even before monetary tightening, due to Covid and the development of teleworking,” he recalls.
However, a significant portion of commercial real estate financing no longer goes through banks, which are restricted by new regulations, but through investment funds, known as “shadow banks”. “There are real estate mutual funds that are highly exposed to this sector, and we must closely monitor them,” adds Mr. de Guindos.
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