IMF Warns of Potential ‘Disorderly’ Home Price Corrections in Europe

The International Monetary Fund (IMF) logo outside the headquarters building in Washington on Sept. 4, 2018. (Yuri Gripas/Reuters)

Home prices in Europe, which are overvalued in many places, might see major price corrections as the region confronts elevated inflation and tight financial conditions, the International Monetary Fund (IMF) warned in a recent report.

Europe is facing multiple economic challenges, with inflation remaining high and financial sector risks materializing. At the same time, real estate markets are showing “growing signs of overvaluation” across the region, according to the April 28 report. In countries such as Hungary, Luxembourg, the Netherlands, Portugal, Iceland, and the Czech Republic, real house prices have doubled since 2015.

The IMF is expecting real estate markets in Europe to see “disorderly corrections,” even if the region were to avoid a “broader financial distress.”

“House price declines could accelerate if markets reprice inflation risks and financial conditions tighten more than expected. These price declines would have adverse effects on household and bank balance sheets,” the report reads.

The organization calculates that 15 to 20 percent of home prices in most European nations are overvalued.

Between 2010 and the fourth quarter of last year, home prices rose in 24 European Union nations and fell in three, according to the EU’s statistics agency Eurostat. Estonia saw the highest increase at 199 percent, followed by Hungary at 174 percent and Lithuania at 142 percent.

The biggest decrease was in Greece, where prices only fell by 14 percent, followed by Italy with 9 percent and Cyprus with 4 percent.

EU Home Price Decline

Since the debt crisis in Europe, real estate prices in the region have risen as a result of easy credit access and low interest rates. But with rates now elevated, prices are falling.

Home prices in the EU registered their first quarter-over-quarter decline since 2015 during the fourth quarter of 2022, according to Eurostat.

“With mortgage rates still on the rise and real incomes dented by inflation, house prices have been declining recently in many markets,” the IMF report reads.

“A housing-market correction is already underway in some European countries—for instance, in the Czech Republic, Denmark, as well as in Sweden, where house prices declined more than 6 percent in 2022.”

Over the next two years, housing prices are expected to fall in the eurozone region, according to credit insurance company Allianz Trade. The Netherlands and Germany are projected to see the biggest drop, with prices declining by 8 percent by the end of 2024.

In Germany, the average value of homes has surged by 50 percent over the past seven years, it stated. In countries such as Italy and Spain, the price fall is expected to be limited.

Household Mortgage Debt Risk

According to the IMF, European household balance sheets are being stretched out due to rising living costs and mortgage rates. The situation could deteriorate even more in case of additional shocks.

The share of households that could struggle this year to afford basic expenses such as food, utilities, rents, and debt repayments is likely to rise by 10 percent, it stated.

In case of adverse scenarios such as higher mortgage rates and living costs, the IMF estimates that about 45 percent of households could be stretched financially, with this group holding more than 40 percent of mortgage debt as well as 45 percent of consumer debt.

“Impacts on bank balance sheets should be generally contained, but the picture would be bleaker under a combination of shocks, including a major house price correction,” the IMF report reads.

In case of a 20 percent downturn in the housing market, losses from housing debt defaults could spike, with Eastern and Southern European nations getting hit the most, according to the organization.

“Such losses could lead to tighter credit standards, increasing the chances of adverse macro-financial feedback loops among bank balance sheets, housing [and other asset] prices, and the real economy.”