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Daniel Dieckelmann

15 November 2022
Financial Stability Review Issue 2, 2022
Since the start of 2022, euro area households have seen the largest increase in consumer prices in decades and the first increase in interest rates in over ten years. For some households – especially those with lower incomes – these shocks could lead to financial distress, including debt defaults. Simulations of the impact of rising consumer prices and interest rates on the near-term financial health of households reveal a more pronounced risk of default in lower income quintiles. For most countries, systemic risk arising from loans originated in lower income quintiles, which represent a lower share of total household debt than loans originated in higher income quintiles, is limited, although it is more significant in some countries. Policy support aimed at dampening the impact of shocks could help to mitigate the risk. Across the euro area, second-round effects stemming from foregone consumption in response to higher financial burdens could weigh on economic performance and further impair banks’ asset quality.
JEL Code
D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance
D63 : Microeconomics→Welfare Economics→Equity, Justice, Inequality, and Other Normative Criteria and Measurement
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G51 : Financial Economics
25 May 2022
Financial Stability Review Issue 1, 2022
House prices increased substantially in advanced economies during the pandemic, fuelling concerns about possible price reversals and their implications for financial stability. Shifts in housing preferences, possibly reflecting a desire for more space coupled with less need for commuting due to teleworking modalities, and low interest rates have been important drivers of such recent strong house price growth across advanced economies. In the current low interest rate environment, increased sensitivity of house price growth to changes in real interest rates makes substantial house price reversals more likely. An abrupt repricing in the housing market – if the demand for housing were to go into reverse, for example, with a return to pre-pandemic work modalities, or real interest rates were to rise significantly – could produce spillovers to the wider financial system and economy.
JEL Code
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
R21 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Household Analysis→Housing Demand
R30 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→General