The International Monetary Fund warns of a “disorderly” home price correction in Europe amid rising interest rates

Stockholm, Sweden – The International Monetary Fund on Friday warned of “disorderly” house price corrections in Europe, at a time when the region is struggling to bring down inflation.

In its latest Regional Economic Outlook for Europe, the International Monetary Fund said that a downward correction is already underway in some European housing markets, but that the decline could accelerate as central banks raise interest rates further.

“Disorderly corrections in real estate markets could occur even if broader financial distress is avoided. The housing market correction is already underway in some European countries, for example, in the Czech Republic, Denmark, as well as in Sweden where house prices fell more than 6% in 2022″.

“The decline in house prices could accelerate if markets re-price the risks of inflation and tightening of financial conditions more than expected. The decline in prices will have negative effects on household balance sheets and banks,” the International Monetary Fund added.

Mortgage payments may also rise, as central banks increase interest rates in an effort to reduce inflation levels. Thus, mortgage holders may have less income to spend and, in some cases, may reach a point where they are unable to repay their loans. Banks may also struggle in an environment where payments are not being made.

“Empirical models linking house prices to their underlying drivers suggest an overvaluation of between 15 and 20% in most European countries. So, with mortgage rates still rising and real incomes falling due to inflation, house prices have recently fallen in many markets,” he said. box.

Data from the European statistical office Eurostat showed Home prices are going down For the first time since 2015. Across the European Union, house prices fell by 1.5% in the fourth quarter of 2022 compared to the previous three-month period.

Alfred Kammer, director of the IMF’s European department, told CNBC in Sweden.

At the same time, estimates point to more challenges with inflation. The International Monetary Fund expects core inflation to be 5.3% in the eurozone this year and 2.9% next year – above the European Central Bank’s target of 2%.

“The ECB needs to raise interest rates relatively early and needs to maintain them until at least mid-2024. We expect to return to the 2% inflation target through 2025,” Kammer told CNBC.

The European Central Bank is due to meet next week, and one of its members recently suggested that an increase of 50 basis points is not on the table. The central bank embarked on a hiking trail in July 2022, when it raised its key rate from -0.5% to 0. The ECB’s key rate is currently at 3%.

The latest eurozone inflation figures showed the core rate dropping to 6.9% in March from 8.5% in February. Core inflation, which excludes energy and food costs, showed a slight increase over the same period.

“More tightening is needed, and when the final interest rate is reached, that final rate has to be maintained for a longer period, because core inflation (…) is high, and it is very persistent. And there is nothing worse than pausing the fight against inflation.” The effort too soon, or giving it up too soon because if you need to do it again, the costs to the economy are much greater.”

In Sweden, where house prices fell significantly last year, inflation expectations also suggest that the central bank has more room to go in terms of higher rates. The headline inflation rate is expected to be 6.8% this year and 2.3% next year, according to the latest International Monetary Fund figures.

The picture is also similar in the UK where headline inflation is expected to reach 6.8% this year and 3% in 2023.

Amid these expectations, the International Monetary Fund suggested that central banks have no choice but to proceed with raising interest rates.

“High core inflation, which is likely to be more persistent than expected, warrants a tightening of monetary policy until core inflation is unequivocally on the path back to the central bank’s inflation targets,” the fund said.