On July 29, the European Systemic Risk Board (ESRB) announced that commercial property in most EU countries shows signs of overvaluation. The warning comes as the European Central Bank (ECB) prepares a new round of monetary stimulus.
The ESRB is responsible for monitoring systemic risks to the financial stability of the EU. In its annual report, it pinned the price surge in commercial property on “high investor demand and the search for higher yields”.
As investors have poured money into property, they’ve become vulnerable to excessive risk-taking
Years of ultra-low interests rates and large bond purchases by the ECB have kept yields below zero in some instances. But as investors have poured money into property, they’ve become vulnerable to excessive risk-taking.
Offices are the most actively traded assets globally on account of their high liquidity and being relatively easy to manage. Savills forecasts that European commercial real estate investment volumes will exceed €230bn by the end of 2019 and noted that the trend was unprecedented in the history of the European investment market.
The ECB stated in November 2018 that the overall real estate market showed signs of overvaluation, though it said these were “mild” and that there were discrepancies between countries. On July 17, however, the ECB warned that commercial real estate values and transactions were nearing levels not seen since before the financial crash.
This may raise concerns that another real estate bubble like that of the 2000s is on the horizon. However, back then the bubble was accompanied by a boom in property-backed lending – notably, the current price surge is not. This has reduced the contagion effect on the banking sector but also makes the issue more difficult for the authorities to address.
The new round of monetary stimulus the ECB is preparing to inject has helped drive up property prices in the last few years. The ESRB can only issue recommendations and these are not binding. The ECB’s main tool in the face of this overvaluation – should it choose to act – is to implement caps on lending.