In its Financial Stability Review, the ECB also warned about further falls in asset prices if the economic outlook deteriorates as a result of the war in Ukraine or inflation turns out to be much higher than expected.
The ECB, which is set to raise its main interest rate in July for the first time in a decade, estimated homes in the euro zone were now nearly 15% over-valued on average and up to 60% in some countries, based on the relationship between prices and income. "An abrupt increase in real interest rates could induce house price corrections in the near term, with the current low level of interest rates making substantial house price reversals more likely," the ECB said in its biannual FSR.Slovakia, Estonia and Lithuania were showing the fastest growth in both residential property prices and mortgage lending.