ECB braced for crash in housing market

BOOMING house prices across the eurozone risk turning into a crash as interest rates rise, the European Central Bank has warned.

Prices in the currency area jumped almost 10pc last year, its fastest on records dating back 20 years, leading to “overvaluation” in some areas and so fears of a crunch.

Low borrowing costs, pandemicdriven changes in demand and a lack of supply have all pushed up prices, according to the Frankfurt-based institution’s Financial Stability Review.

But those factors may not all support rising prices forever.

“While house price pressures are buttressed in the near term by tight supply conditions and continued demand amid household and investor preference for housing, signs of overvaluation render some housing markets prone to price corrections,” the report said.

“In particular, an abrupt increase in real interest rates could induce house price corrections.”

This risks a wider economic crunch as households take on big mortgages to buy property just as inflation eats away at spending power and rising interest rates push up the cost of those loans.

The warnings echo fears that Britain’s market, which has hit a series of record highs with double-digit price growth since the pandemic struck, could also slow down or go into reverse.

Stock markets in the eurozone could also suffer after prices surged on the back of low interest rates in the wake of the pandemic. “Higher interest rates could challenge the valuations of riskier assets, such as equities,” the ECB said.

Heavily indebted governments could also struggle, raising the spectre of the sovereign debt crises of a decade ago.

As nations grapple with the fallout of Covid, costs from the war in Ukraine and rising debt interest rates, they may also struggle to pay to soften the blow from any other crises.