ECB sees rising risk that housing bubble will burst

FRANKFURT (Reuters) - The euro zone housing market is heating up, increasing the chances of a correction in both the residential and commercial segments, the European Central Bank said in a stability report on Wednesday.

With families building up savings during pandemic and increasingly working from home, demand for property is on the rise, pushing house price growth to over 7%, its fastest rate since 2005.

"Risks of price corrections over the medium term have increased substantially amid rising estimates of house price overvaluations," the ECB said in a biannual stability report.

Construction cannot keep up with demand and the residential market is especially hot in countries such as Germany, France and the Netherlands.

"Despite the recovery in residential construction, labour shortages, global supply chain bottlenecks and input price increases are weighing on the construction sector’s ability to expand housing supply, which is putting upward pressure on house prices," the ECB said.

While the prime commercial real estate market is now recovering, the outlook is "particularly poor" for lower-quality commercial real estate as remote working, health concerns and the rush for greener property are channelling demand towards the prime segment, the report said.

On a positive note, the ECB added that the risk of a surge in corporate bankruptcies, a major fear a year ago, has eased, even as some government support measures have now been removed.

"On average, corporate defaults have come in lower than the most optimistic expectations earlier in the pandemic while insolvencies have remained around 15% below pre-pandemic levels," the ECB said.

(Reporting by Balazs Koranyi; Editing by Lisa Shumaker)