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    ESRB Assesses Vulnerabilities in Residential Real Estate in EEA

    September 23, 2019

    ESRB published a report on its systematic, forward-looking assessment of vulnerabilities in the residential real estate sector in the European Economic Area (also known as EEA). Following this assessment, ESRB published a set of country-specific warnings and recommendations on medium-term vulnerabilities in the residential real estate, or RRE, sector. ESRB has a mandate to issue warnings when significant systemic risks are identified and to provide recommendations for remedial action to address such risks. The warnings were sent to the competent ministers of five countries: the Czech Republic, France, Germany, Iceland, and Norway. Additionally, the recommendations were sent to the competent ministers of six countries: Belgium, Denmark, Finland, Luxembourg, the Netherlands, and Sweden. The sub-recommendations contained in each recommendation have a specific timeline for implementation, ranging from 2020 to 2022.

    ESRB also published the following reports:

    • The report presenting the quantitative framework developed by the ESRB Working Group on Real Estate Methodologies for the assessment of both residential real estate vulnerabilities and related macro-prudential policies across EU countries. The report provides the analytical framework for the ESRB assessment of vulnerabilities in the area of residential real estate.
    • Follow-up report on the countries that received ESRB warnings in 2016 concerning medium-term vulnerabilities in their residential real estate sectors. The report reviews the evolution of the vulnerabilities since 2016 as well as the policy responses aimed at mitigating the vulnerabilities in Austria, Belgium, Denmark, Finland, Luxembourg, the Netherlands, Sweden, and the United Kingdom.

    The assessment of the residential real estate sector in all EU member states, Iceland, Liechtenstein, and Norway concluded that vulnerabilities exist in these eleven countries for which warnings and recommendations have been issued by ESRB. These vulnerabilities may be a source of systemic risk to financial stability in the medium term. The assessment of vulnerabilities is based on available data and covers developments up to the end of March 2019. ESRB had issued warnings to certain countries in 2016; the recommendations were issued to those countries whose vulnerabilities are not being sufficiently addressed post the warning. Additionally, the countries that have been newly identified with vulnerabilities that are not being sufficiently addressed received the warnings. 

    ESRB did not find significant direct near-term risks arising from residential real estate exposures in the banking systems of the countries receiving warnings and recommendations, although second-round effects cannot be excluded in the medium term. Moreover, these countries have taken steps to ensure the resilience of their banking sectors, for example, through an increase in bank capital requirements in recent years. In most of these countries, however, medium-term vulnerabilities are generated by a combination of vulnerabilities related to household indebtedness and house price levels and dynamics. The exact vulnerabilities vary for the countries receiving the ESRB warnings and recommendations. The key vulnerabilities highlighted by ESRB assessment are of a medium-term nature and relate to the following:

    • High or rising household indebtedness and the ability of households to repay their mortgage debt
    • Growth of mortgage lending and the loosening of lending standards
    • Valuation or price dynamics of residential real estate
    • House price growth or the overvaluation of residential real estate 

    Regarding the remaining EU member states, ESRB has either not identified a buildup of any material vulnerabilities related to the residential real estate sector or such vulnerabilities have been identified but the current policy stance has been assessed as sufficient in addressing them. This is the case for Austria, Estonia, Ireland, Malta, Portugal, Slovakia, and the United Kingdom.


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    Keywords: Europe, EU, Banking, Systemic Risk, Residential Real Estate, Financial Stability, EEA, Macro-Prudential Policy, Recommendations, ESRB

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