Residential real estate sector vulnerabilities

Speech by Tuomas Peltonen, Deputy Head of Secretariat, European Systemic Risk Board, at the public hearing of the HOUS committee

Brussels, 3 July 2025

Madame Chair, Members of the Committee, Ladies and Gentlemen,

Thank you for inviting me to this public hearing to discuss residential real estate vulnerabilities.

Housing is a vitally important societal issue. The European Systemic Risk Board (ESRB) therefore welcomes the appointment of the first-ever Commissioner for Housing and the creation of the Special committee on the Housing Crisis in the European Union.

While the social aspects of housing are fundamental for the society’s welfare, in my remarks I will focus on financial stability aspects, in line with the mandate of the ESRB.

Financial stability is a precondition for economic stability, which increases household welfare.

Why does housing matter for financial stability?

Beyond the basic role of housing, which is to provide people with a place to live, it also represents a major part of household wealth. Mortgages make up a large part of banks’ balance sheets and are the largest form of debt among households. And housing construction is an important component of the real economy – as a source of employment, investment and growth.

As we have learned from past banking and financial crises, the rapid and persistent growth in credit and house prices, combined with high levels of household indebtedness and leverage, makes economies vulnerable to shocks and adverse developments in the housing markets.

Housing busts are common causes of banking crises and typically have dire consequences. These can range from reduced asset quality, credit contraction and declines in consumption, to bank failures, which in the past have led to government bailouts of financial institutions.

Recessions following residential real estate market busts are common and tend to be particularly deep and prolonged.

Moreover, the systemic nature of a real estate crisis can further exacerbate its negative consequences – as we saw in the global financial crisis of 2007-08, which spread due to complex interlinkages and interactions in the global financial system.

What macroprudential instruments are available to mitigate housing-related financial stability risks?

The toolkit available to national macroprudential authorities in EU Member States encompasses two main categories of instruments for addressing residential real estate risks: capital-based measures and borrower-based measures.

Capital-based measures determine regulatory capital requirements for lenders’ exposures to residential real estate either directly or indirectly.

The legal framework for the implementation of these instruments is harmonised in the EU through the Capital Requirements Directive (CRD VI) and the Capital Requirements Regulation (CRR III).

Borrower-based measures directly affect the terms and conditions of lending by setting caps on loan-to-value, debt-service-to-income and debt-to-income ratios, as well as amortisation requirements and maximum loan maturities.

They are not included in the EU harmonised legal framework, and their use is governed by national laws, with different definitions of instruments and institutional set-ups in place across Member States.

Introducing activity-based borrower-based measures into EU law would ensure that a basic set of instruments is available in all Member States, and that instruments can be applied to all types of lenders. However, sufficient flexibility should remain in order to address national specificities.^[1]

How have EU countries used macroprudential measures and what is the ESRB’s role?

Over the years, the ESRB has actively highlighted vulnerabilities related to residential real estate markets in EU Member States and proposed policy actions to mitigate these risks.

The ESRB has issued 18 country-specific Warnings and eight Recommendations dedicated to residential real estate risks. Overall, there has been a good degree of compliance with the ESRB Recommendations.

Macroprudential authorities in EU countries have recognised the systemic risks stemming from residential real estate and have activated macroprudential instruments to mitigate these risks.

Currently, there are 24 EU Member States with at least one borrower-based measure activated, and six with a sectoral systemic risk buffer applied to residential real estate exposures. In addition, there are nine Member States which have applied additional measures for risk weights for residential real estate exposures.

How does macroprudential policy interact with other policies and policy objectives?

Housing market dynamics and vulnerabilities are influenced by the interaction of various social and economic policies that need to be considered as well.

The housing sector is highly regulated by policies that target the availability and affordability of dwellings, as well as safety and environmental regulation and urban planning.

Importantly, fiscal policy has an impact on house prices and household indebtedness through, e.g. tax incentives for holding property or contracting mortgages.

Moreover, monetary policy plays a key role by influencing interest rates and margins charged on mortgages, with an impact on household interest rate expenses, house price dynamics as well as banks’ profitability and, by extension, their capital levels.

Finally, implicit or explicit state guarantees or subsidies for the various actors in the real estate market may also further influence real estate prices.

Thus, macroprudential policies are needed to address vulnerabilities and risks to financial stability stemming from other policies and objectives, as well as their interactions.

There are, however, constraints to the effectiveness of macroprudential policy. For instance, macroprudential instruments have limited power when large portions of real estate are acquired without a loan, often by non-residents. They also have limited effect on influencing the supply of certain types of housing, for instance social housing. Government interventions are required to address such issues.

Macroprudential instruments can also be adjusted to fit the desired social objectives of housing, such as allowing young households with lower savings to finance home acquisitions. It is now common across the EU countries for the borrower-based measures to have exemptions that allow banks to dedicate a certain share of their loan portfolio to borrowers that do not fully meet the established criteria. As long as this share remains low, it should not cause a substantial drop in resilience.

What are the current housing market vulnerabilities in EU countries?

After an orderly correction driven by the increase in interest rates starting in 2022, house prices are now entering a new upturn in several EU Member States. Housing credit growth is also picking up, showing a revival of mortgage demand after the easing of monetary policy. This means that cyclical risks related to residential real estate markets are starting to build up again, while structural risks, such as high household indebtedness, are still present in many countries. Both aspects require attention from macroprudential authorities.

To conclude, the social challenge of affordable housing is difficult to address during – and shortly after – a financial crisis. Therefore, it is important to preserve financial stability using macroprudential policy.

Thank you for your attention, and I look forward to your questions.