ECB Warns Of "Excessive Exuberance" In House Prices; Sees Financial Instability Due To Higher Yields

Tyler Durden's picture

In an unexpected two-part warning from the ECB, the European Central Bank warned of “excessive exuberance” in some European housing markets, driven by offshore buyers, that could spread to other areas in a “ripple effect.” Separately, the ECB also said "debt-sustainability concerns" have risen in the past six months amid a potential increase in yields and political uncertainty in some countries.

We start with the latter warning, which we find ironic as it is a function of the ECB's own policies of keeping rates suppressed at record lows to promote inflation, and now that inflation has finally emerged, the ECB is worried about the spillover and unwind of its policies. "Risks to financial stability stemming from financial markets remain significant,” the ECB said in its Financial Stability Review. An abrupt bond-market repricing could “materialize via spillovers from higher yields in advanced economies, in particular the United States.”

The ECB also warned that euro-area banks remain vulnerable as low interest rates and a big stock of non-performing loans in some regions challenge profitability. It cited structural challenges in the industry, including overcapacity and too little income diversification.

In Italy, which has one of the euro region’s highest debt ratios and where the government is trying to finalize a plan to rescue Banca Monte dei Paschi di Siena SpA, business lobby Confindustria said on Wednesday that the country must “be ready for when the ECB will end sovereign bond purchases” according to Bloomberg. This means “quickly lowering the mountain of public debt through privatizations and sale of state-owned real estate,” Chairman Vincenzo Boccia said in Rome.

While it did not show it, the chart below from Goldman summarizes the threat: a normalization of European rates would result in double digit principal losses for bondholders in countries like German, Spain, France and Italy... but not if they sell first to other "greater fools." It is this transition from a stable to a chaotic market, that is currently troubling the central bank.

Two steps ahead of the ECB, the Fed has already raised rates twice since late last year and policy makers predict two more hikes in 2017. In Europe, an exit from unconventional stimulus is also moving closer, even though officials caution that quantitative easing must be unwound very gradually before higher borrowing costs should even be discussed.

As it has done repeatedly in recent months, the ECB report also warned that Brexit “contributes to prevailing political uncertainties,” but said the impact on financial stability should be limited as long as banks take proper action in time. It sees a low risk of the euro-area economy facing restrictions in accessing financial services after Britain’s departure from the European Union.

“Well-managed preparations will be essential as a relocation of financial services capacity during the transition from the current situation to the new equilibrium could, in some cases, face frictions,” according to the report. “Therefore, the ECB underlines the need for the concerned banks and other financial institutions to undertake all the necessary preparations in a timely manner.”

* * *

Separately, in a warning that resident of Vancouver and Toronto will appreciate, the central bank also cautioned that since 2010, house prices in European capital cities have risen far more than national averages. The ECB cited Berlin, Paris, Vienna and Amsterdam as cities that have performed particularly well.

While it did not use the words irrational exuberance, it came close, when the ECB said that “exuberant house price developments in certain regions could, in principle, threaten the stability of financial institutions with mortgage exposures concentrated in those regions."

Although diverging developments at the regional level could be justified by fundamentals, such as differences in regional income, employment, population dynamics and amenities, they could also signal excessive exuberance of house prices in certain areas, for example due to the strong presence of foreign buyers

While hardly rocket science, Bloomberg points out that record-low interest rates have fueled demand for residential properties as investors seek to buy assets that generate returns rather than depositing their money in banks. That has benefited housing markets in Germany, France and the Netherlands, as well as Estonia and Ireland, the ECB said.

Compounding the problem, the central bank warned that elevated levels of household indebtedness and large real estate exposures of banks in countries such as Finland and the Netherlands could  “amplify” shocks. The central bank said it’s monitoring property-market developments closely and may top up national measures if necessary.

To which all we can say is that we wish the ECB, which created all the problems it now complains about, the best of luck as it scrambles to contain the genie inside the bottle.

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NoDebt's picture

We warned you!  We said "excessive exuberance!"

- After the next crash

Buck Johnson's picture

it's going to be bad.


AlexCharting's picture

The idea that houses become MORE valuable as they age is stupid. Houses are not like wine! Aging is just as bad for houses as it is for cars etc.

ElTerco's picture

Where I live, a good chunk of the home value is in the parcel.

nn0933455's picture

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Arnold's picture

You Know I do.
Another layer of insecurity, yet, much like claymores, it is better to have some warning, than non at all.

BandGap's picture

Excessive exuberance. Yeah, that's the problem. Fucking manipulating assholes.

nn0933455's picture

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go here to this page>>>>>>>>>>

Dilluminati's picture

Your sister and her roomate earned that money sucking tube steak.  Your mom taught her how.  She tells people she earned money online, but she was selling her ass on craigslist.

BandGap's picture

She's Japanese, it's in Yen.  Do the math.

nn0933455's picture

Do you use a pay_pal... in the event if you have you can get an extra 1200 week after week to your profit working from home 3 hours per day..

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DavidC's picture

Member for
5 days 19 hours

Fuck off.


Yen Cross's picture

  The nork/nigerian troglodytes are geting old. They're like Savanna horse flys.

yogibear's picture

Must mean more QE. More and more financial heroine. Won't stop until a currency crisis appears in a large region.

wmbz's picture

ECB Warns Of "Excessive Exuberance"

Really? Who brought it about asshole? Do all a favor and shut the fuck up!

DavidC's picture

FFS Draghi!


Let it Go's picture

The ECB and other central banks often claim deflation drives or allows their QE policy to remain and is central to their ability to stimulate. The moment inflation begins to take root or becomes apparent much of their flexibility in policy is lost. The 2% inflation target central banks have deemed optimum is not valid.

In the past, I have put forth the idea that inflation could rule the day even if central banks are unable to keep the wheels on the bus and the economy collapses. This powerful force also known as stagflation can devastate those improperly invested. The article below explores the basis of this theory.

buzzsaw99's picture

or else what?  or else they will have to buy a bunch of mbs off the failing euro banks??? lulz lulz lulz

booboo's picture

Ahh, I get it now, blow a bubble with massive fiat shocks, burst it and buy up all the bad debt which allows you to print more money. Genius!

To Hell In A Handbasket's picture

The ECB fuckers just noticed? Somebody should hold him down and stab him in the eye. These bastards cultivated this scenario and implemented polices for its continuance. Now they are giving warnings to the plebs, because every man and his dog, knows the shit is going to hit the fan eventually?

Yen Cross's picture

  Just wait and watch sovereign yields blow out if Draghi hints at pulling the plug.

 Sell the rumor comes to mind.

buzzsaw99's picture

or else what?  or else they get even NIRPier?

BigFatUglyBubble's picture

yea, i'm starting to think the nominal numbers don't matter.  It's just a matter of keeping the money hot relative and in balance to the real wealth that is created.

NaiLib's picture

Once again we see how Central banks first dreated a bubble, only to delibetately blow it up. Rinse and repeat

FreeShitter's picture

You are witnessing the greatest transfer of wealth of all time

BigFatUglyBubble's picture

hey, this interview enlightened me on some things.  I thought perhaps you would be interested.

NaiLib's picture

this is what will keep the fire under BTC burning. If the bobble bursts, they will prinnnnnt more dispite high interest ratas. Stagflation is coming fast


GodHelpAmerica's picture

Anyone notice recently that plane ticket prices in US have been falling over time?

Was going to book a flight 1.5 months ago; glad I didn't. Price dropped considerably, which is counter the typical trend...

NoWayJose's picture

I did see too. Got raped for a March flight, got a deal for a May flight.

Arrest Hillary's picture

Relativity .... it's not so much that gold has gone down .... it's more that everything else has gone up .... who would have thunk it ?

NoWayJose's picture

If you look around the whole world, there is very little that is not up 15% or more in the last 6 months to a year. Even the great Brazilian crash last week only knocked back a little on an otherwise huge gain. I cannot find anything not in a bubble, except maybe gold and silver.

GodHelpAmerica's picture

Draghi should have an ECB building built out of the trillions in worthless sovereign bonds he's purchased.

J J Pettigrew's picture

Central bankers smooth out all the business cycles.....cycles that have a purpose....and in so doing, CREATE MEGA CYCLES...

Yen Cross's picture

 Either the euro or the yen is going to cave-in. These are NOT risk-ON markets.

  Personally based on my overlays, I think the euro has some gaps to fill, and the yen based on futures/ Delta/Zeta, is range bound.

PrivetHedge's picture

Number of people out of the 400bn affected by the ECB who voted for it:



Number of Central Banks required to make Capitalism work:



The ECB is like the FED, a brazen way for the elite bankers to steal our weaith with their debt usuary scheme. 

Yen Cross's picture

Tyler, I want to see that picture of Draghi running from a nice set of tits.

  Bankster pussy fags.

Sirius Wonderblast's picture

Since the inflated prices are a fig leaf for the fantasy security of their banks' lending portfolios, they might want to shut up.

Vardaman's picture

Mario DraghQueen

blizzard's picture

I write this in Japan having read in the Japan Times today that Japans Property Market is again "chasing the Dragon" and approaching nose bleed levels!

Hope Copy's picture

Luxury market chasing luxury, but what are the fundementals?  I'd be buying apartment buildings (my 'favorate' Ukrainian banker did.. and got them rented)..  Hey girlfriend... How's Miami?

khakuda's picture

You have to love when Central Bankers lament the growing wealth inequality and frothy asset prices they have caused and continue to cause.

I can just hear Draghi in his Italianized English:  "It is so terrible that au pairs are subjected to unwanted advances by the married men employing them.  Now move a bit more to the left my sweet nanny so I can achieve my climax."

Herdee's picture

Today, everyone is desperate to put a good light on Italy's banking problems. The government in Italy is so socialist and bust that they will have to start selling off assets to pay their bills. It makes Greece look like a kindergarden.