EU steps in to prevent housing bubbles

The European Commission is preparing to step up surveillance of housing markets in an attempt to prevent the kind of crash that sent the Irish government begging for aid from the EU and IMF to bail out banks heavily exposed to the property market. In the pipeline are a series of proposals on mortgage credit and capital requirements, but beginning on 13 December, the Commission will also begin monitoring house prices, part of an agreement to increase scrutiny on macroeconomic policies that could leak to other countries, causing strains across the EU.

It will do this via an ‘imbalances scoreboard’, where levels of debt, investment, wages and house prices, amongst other things, will be reviewed over time. An alert will be flagged if prices rise more than 6% year on year, which could prompt an in-depth investigation by the Commission if other warning signs - such as high credit growth or private sector debt - appear at the same time. This report will look at the factors driving house price growth, which EU sources say will include social housing. “Social housing is not usually - if ever - a source of a bubble, and in any event its role evolves slowly over time, but it is one factor in shaping overall developments in housing markets,” said one source, who did not wish to be named because the plans are still in the early stages. “The Commission needs to understand social housing developments in member states if we are to be in a position to have a full picture of factors driving house prices in each country.”

Price movements will also be examined by banks under a provision in the new Directive on capital requirements (CRD4). It is still unclear exactly how the scoreboard and any subsequent recommendations to address imbalances will affect social housing, although in its latest quarterly report on the eurozone, the European Commission comes down against encouraging home ownership through 100% mortgages and tax relief, and suggests instead a focus on rentals and shared ownership.

This is where other EU regulations come into play, with the bloc attempting to crack down on lax lending practices and asking banks to boost high-quality capital reserves. The Directive on mortgage credit places stringent requirements on lenders to investigate the creditworthiness of their clients when offering loans, potentially increasing costs and workload for housing associations, who say they should either be exempt from the rules or be allowed to offer larger mortgages at favourable interest rates under a special ‘social clause’. Meanwhile, an overhaul of the CRD4 is in train, which gives national regulators the power to set higher risk weights for mortgage assets and forces lenders to hold only ‘highly liquid’ assets, still to be defined by the European Banking Authority. The directive also sets limits on mortgage lending, which cannot exceed a percentage of the losses incurred each year.

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