21 August 2018

EBA: Property prices are to plunge under the adverse scenario

01 February 18 - RE+D Magazine
EBA: Property prices are to plunge under the adverse scenario



The European Banking Authority (EBA) launched yesterday its 2018 EU-wide stress test and released the macroeconomic scenarios.


The adverse scenario implies a deviation of EU GDP from its baseline level by 8.3% in 2020, resulting in the most severe scenario to date. The EBA expects, according to its official press release, to publish the results of the exercise by 2 November 2018. According to EBA the  scenario  is  triggered  by  a  shock  to  bond  yields  and  equity  prices  in  global  financial markets.

This reflects changes in market participants’ expectations about economic policies in major  economies outside  the  European Union,  which  triggers a  repricing  of  risk  premia.

Global equity prices would decline significantly across all jurisdictions and, in particular, in the United States, where equity prices would decline by 41% in 2018. As a result, and amplified by  a  sell-off of  assets by the  non-bank  financial  sector,  EU  stock  prices  would also fall sharply, by about 30% in  2018 in  comparison  with  the  baseline.

The  global  shocks are  also  assumed  to  negatively  affect  confidence  in  all  EU  countries, resulting in country-specific reductions in private consumption and investment which take into account  recent  economic  performance  of  each  country.

GDP growth

Particularly in Greece the GDP growth rate can deviate -3,7%, -4,6% and -2,2% versus the baseline growth of 2,4%, 2,5% and 2,4% for the years 2018, 2019, 2020 respectively. The adverse growth rates are estimated at -1,3%, -2,1% and 0,2% in 2018, 2019 and 2020 respectively.

Unemployment rate

In terms of unemployment rate the baseline for Greece is estimated at 19,9%, 18,3% and 16,6% from 2018 onwards to 2020 with the rate deviations spanning from 0,75 to 2,5% (0,7% in 2018, 1,7% in 2019 and 2,5% in 2020). On the adverse scenario Greek unemployment rate will stand at 20,6% in 2018, at 20% in 2019 and 19,1% in 2020.


EBA suggests that the  significant  decline of  domestic demand,  together  with  increased  risk  premia, would trigger  domestic  vulnerabilities  in  the residential  and  commercial real  estate sectors which  would  result  in  a  major slowdown  in property   market   activity,   both   in   the   residential   and   commercial   property   segments.

Residential  property  prices  would  fall  by  27.7%  below  the  baseline level by  2020  and  the cumulative fall in residential property prices over the cenario horizon is about 19% at the EU aggregate  level.

Commercial property prices would also decline substantially over the scenario horizon and, on average in the European Union, would fall about 27% below the baseline. The cross-country distribution of the property price shocks reflects mainly individual countries’ vulnerability to these sectors and the magnitude of (any) overvaluation or undervaluation of property prices in both market segments.

Residential property prices

Particularly in Greece property prices are expected to decline by 0,5% in 2018, given the baseline estimations. In 2019 the residential property market is expected to modestly improve recording a positive growth rate of 0,5%, while in 2020 this growth is expected to increase at 1%.

From these baseline figures the growth rate may deviate by -6,8% in 2018, -7,2% in 2019 and -4,6% in 2020. On the adverse scenario property prices growth rate wil plunge 7,3% in 2018, 6,7% in 2019 and 3,6% in 2020.

Commercial property prices

Commercial property prices will grow by 0,3% in each of the next three years starting in 2018. The growth rate of commercial property prices in Greece may deviate from the baseline by -9,5% in 2018, -6,4% in 2019 and -2,5% in 2010. In the adverse scenario commercial property prices will record a negative growth rate of 9,2% in 2018, 6,1% in 2019 and 2,2% in 2020.


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