Scientific studies, for example those analyzing the 2008 global financial crisis, are able to link an increase in bank lending to the real estate sector and inflated property prices to banking crises. Real estate loans currently make up a substantial portion of corporate loan portfolios at European banks, and thus pose one of the core risks to financial stability in the eurozone.
On behalf of the European Parliament’s Committee on Economic and Monetary Affairs, the Policy Center at the Leibniz Institute for Financial Research SAFE has investigated which factors influence the risk associated with real estate loans and how it can be reduced. These risks can stem from various sources—such as the borrowing party, collateral, or the purpose of the loan. The analysis is based on the AnaCredit database maintained by the European Central Bank (ECB). Study authors Rainer Haselmann and Tobias Berg recommend tighter regulation of real estate lending, greater data transparency across the euro area, and the integration of real estate risks into monetary policy to reduce financial vulnerabilities.
Risks differ depending on the country
“Banks in the euro area are exposed to significant credit risks,” says Tobias Berg, affiliated Research Professor at SAFE and Professor of Banking at Goethe University. “Currently, real estate loans account for a large share of corporate lending, and on average, nearly half of European banks’ corporate loan portfolios are exposed to real estate risk.”
However, the extent of the risk differs significantly depending on the country: while real estate prices in Germany and Austria have doubled since the 2008 financial crisis, they are below their 2008 level in Greece, Italy, Ireland and Spain.
Impact of ECB monetary policy and Basel III
The study identifies two main drivers of banks' real estate risk: ECB monetary policy and the prevailing financial regulatory framework. “The ECB’s expansionary unconventional monetary policy has unintentionally fueled property price increases by boosting credit availability,” explains Rainer Haselmann, Rainer Haselmann, affiliated Research Professor at SAFE and Professor of Finance, Accounting and Taxation at Goethe University.
Likewise, the financial regulatory framework Basel III, have encouraged real estate lending by assigning mortgage loans a relatively lower risk weight compared to corporate loans.
Three recommendations for risk reduction
The study authors outline three measures policymakers in Europe can take to mitigate real estate-related financial risks, strengthen the banking sector’s resilience, and promote long-term financial stability. First, stricter regulation of real estate lending would help ensure that actual risks are more accurately accounted for. Second, data consistency and transparency in the euro area should be improved to allow policymakers to make informed decisions. Third, the ECB should factor in real estate risks when setting monetary policy to avoid unintended consequences for financial stability.
You can find the study "Assessing real estate risks and vulnerabilities" here.
