* Medium-term risk from overvaluation or household debt
* No mention of Germany despite sharp rises in some cities
* ESRB warns of risks to bank sector if low rates persist
(Adds Draghi quotes)
By Balazs Koranyi
FRANKFURT, Nov 28 The residential property
market risks overheating in eight European Union countries,
including Britain, partly from unintended effects of ultra-low
interest rates, the EU's financial risk watchdog said on Monday.
The eight countries face a medium-term risk either from
overvaluation or excessive household debt levels, a systemic
risk to the bloc's financial stability that requires regulatory
attention, the European Systemic Risk Board said in a report.
The ESRB issued warnings to Austria, Belgium, Denmark,
Finland, Luxembourg, the Netherlands, Sweden and Britain. It
asked local authorities to devise appropriate measures and noted
the vulnerabilities of banks in an environment of persistently
low interest rates.
"Household indebtedness and the overvaluation of residential
real estate develop over the course of years," ESRB chair and
European Central Bank head Mario Draghi said while presenting
the report to an EU parliamentary committee.
"But, in the event of a shock, the related vulnerabilities
can materialise quickly - for example, in the form of reduced
household consumption, loan defaults and price falls."
There was no mention of Germany, the bloc's biggest economy
with a booming housing market, suggesting that sharp price
increases noted in several key cities have not created systemic
Trying to kick-start growth and inflation, central banks
across Europe have kept rates near or below zero, cutting
borrowing costs to record lows.
Fuelling the boom, the ECB has promised to keep rates at
current or lower levels for an extended period, suggesting that
sub-zero rates may be around for years, potentially exacerbating
asset price bubbles.
Cheap credit is a boon to consumers but has pushed property
prices to record highs in some markets, also increasing the risk
that households might struggle to pay back debt once rates
return to normal levels.
This could eventually ricochet on the banks.
"As regards the banking system of the warned countries, the
ESRB has not identified direct near-term risks arising from
residential real estate exposures, although second-round effects
are not excluded in the medium term," Draghi said.
In Britain, property prices were at record highs before the
June referendum on leaving the EU and a potential economic
slowdown could leave some households vulnerable as rapid price
increases have already stretched collateral, indicating that
falling property prices could quickly reduce collateral levels.
"An economic slowdown could lead to the crystallisation of
some risks - e.g. if unemployment rises and/or income growth
falls, then some households may find it more difficult to
service their debt," the ESRB said in the report.
If the market's slowdown is only temporary, Britain is still
at risk of overvaluation and collateral stretch, the ESRB said.
Responding to the ESRB's warning, decided in September but
only published on Monday, UK Chancellor Philip Hammond said the
Financial Policy Committee would continue to monitor the UK real
estate market and would take action, if necessary.
In a separate report, the ESRB also warned of broader risks
to the bloc's banking sector from an extended period of low
interest rates, as the environment forces lenders to take on
"Financial stability risks related to financial markets may
increase in the low interest rate environment because of a
search for yield, crowded position in some categories of assets,
including real estate, and uncertainty about fundamental asset
price values," the ESRB said.
In such a scenario, there is a risk of asset price
misalignments, which can lead to abrupt revaluations,
potentially stretching bank balance sheets.
A possible response could be to limit the value of loans as
a percentage of asset prices, improve loan affordability tests
or better collateral valuation standards, the ESRB said,
stressing that these were not warnings or recommendations.
The ESRB added that low profitability will also weaken
banks' resilience and low growth could worsen asset quality. In
addition to lenders, low rates are also hurting insurance firms
and pension funds.
A gradual increase in interest rates is less of a worry,
however, as it would signal a rebound in growth, suggesting that
prolonged low rates are a bigger concern.
(Reporting by Balazs Koranyi; Additional reporting by Guy
Faulconbridge and Francesco Canepa; Editing by Tom Heneghan)