A pedestrian checks ads for residential properties on the market in Stockholm, Sweden.
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STOCKHOLM, Sweden — The International Monetary Fund warned on Friday of “disorderly” adjustments to house prices in Europe because the region struggles to bring inflation down.
In its latest regional economic outlook for Europe, the IMF said some European housing markets are already in a downward correction, however the decline could speed up as central banks raise interest rates.
“Disorderly corrections in real estate markets may occur even when broader financial problems are avoided. The correction in the housing market is already underway in some European countries, for instance in the Czech Republic, Denmark, in addition to in Sweden, where house prices fell by greater than 6% in 2022.
“House price declines could speed up if markets overestimate the danger of inflation and financial conditions tighten greater than expected. These price drops would have a negative impact on the balance sheets of households and banks,” the IMF added.
Mortgage payments may increase as central banks raise interest rates to bring down inflation. In consequence, mortgage holders can have less disposable income and in some cases may even reach a degree where they can not repay their loans. Banks can even struggle in an environment where repayments will not be made.
“Empirical models linking house prices to their underlying aspects show an overestimation of 15-20% in most European countries. Subsequently, with mortgage rates still rising and real incomes strained by inflation, house prices have been falling in many markets recently, the Fund said.
He showed data from the European statistical office Eurostat house prices are falling for the primary time since 2015. Across the European Union, house prices fell by 1.5% in the fourth quarter of 2022 in comparison with the previous three-month period.
“General house price problems exist in all countries, not only high-indebted countries, and must be handled under supervision. They must be addressed with stress tests, they must be watched very closely,” Alfred Kammer, director of the IMF’s European department, told CNBC in Sweden.
Sticky inflation
At the identical time, estimates point to further challenges related to inflation. The IMF expects headline inflation to average 5.3% in the euro area this 12 months and a pair of.9% next 12 months – above the European Central Bank’s goal of 2%.
“The ECB needs to boost interest rates relatively early and keep them at the very least until mid-2024. We expect to return to the two% inflation goal in 2025,” Kammer told CNBC.
The European Central Bank is on account of meet next week and one of its members recently suggested that a 50 basis point rate hike shouldn’t be out of the query. The central bank began the trek in July 2022 when it lowered its key rate from -0.5% to 0. The ECB’s key rate is now 3%.
The most recent inflation printout in the euro zone showed that the predominant interest rate fell to six.9% in March from 8.5% in February. Core inflation, which excludes energy and food costs, showed a slight increase over the identical period.
“Further tightening is required, and when the ultimate rate is reached, the ultimate rate must be maintained for longer, as core inflation is (…) high and really persistent. And there is nothing worse than stopping the fight against inflation, making an effort too soon or giving up too soon, because if you’ve to do it a second time, the associated fee to the economy is far greater,” Kammer said.
In Sweden, where house prices fell significantly last 12 months, inflation expectations also suggest that the central bank has more room to maneuver interest rate hikes. Based on the newest IMF data, headline inflation will probably be 6.8% this 12 months and a pair of.3% next 12 months.
The image can also be similar in the UK, where headline inflation is anticipated to succeed in 6.8% this 12 months and three% in 2023.
Amid these forecasts, the IMF suggested that central banks don’t have any selection but to speed up further rate hikes.
“High and potentially more persistent than expected core inflation requires a tightening of monetary policy until core inflation is on a path back to central bank inflation targets,” said the Fund.