European Housing Markets at a Turning Point – Risks, Household and Bank Vulnerabilities, and Policy Options

IMF Working Papers, March 24, 2023

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Canonical URL: European Housing Markets at a Turning Point – Risks, Household and Bank Vulnerabilities, and Policy Options

Paper aims to (i) shed light on the risks in European housing markets, (ii) quantify household vulnerabilties, (iii) assess banking sector implications and (iv) examine policies’ effectiveness using simulations based on microdata from the Household Finance and Consumption Survey (HFCS) and EU statistics on income and living conditions (EU-SILC).
Context: the cost-of-living crisis has eroded real incomes and the surge in interest rates has made borrowers more vulnerable to financial distress.

Under the baseline IMF macroeconomic forecast, the share of households that could struggle to meet basic expenses could rise by 10 pps reaching a third of all households by end 2023.
Under an adverse scenario, 45 percent of households could be financially stretched.
In the adverse scenario, these financially stretched households would represent over 40 percent of mortgage debt and 45 percent of consumer debt.

Under the baseline forecast, the impact on the banking sector seems contained, though there are pockets of vulnerability.
A 20 percent house price correction could deplete CET1 capital by 100-300 basis points.

Fiscal measures, such as subsidies to the bottom income tercile, could save 7 percent of households from financial distress at an estimated cost of 0.8 percent of GDP.

IMF Working Papers, Working Paper No. 2023/076, Issue 076, Pages: 47, Volume: 2023.
DOI: https://doi.org/10.5089/9798400237782.001
Authors: Laura Valderrama, Patrik Gorse, Marina Marinkov, Petia Topalova
Subject areas: Consumption, Financial institutions, Housing, Housing prices, Income, Mortgages, National accounts, Prices
Keywords: affordability, bank capital, banking sector implication, consumption, Eastern Europe, EU banking sector, Europe, financial stability, house price correction, household vulnerability, Housing, housing market correction, Housing markets, Housing prices, Income, income distribution, macroprudential policy., Mortgages, overvaluation, targeted support, tenure status

IMF Working Paper: European Housing Markets at a Turning Point – Risks, Household and Bank Vulnerabilities, and Policy Options