The commercial real estate sector in the eurozone could face difficulties for years, posing a threat to the banks and investors who finance it, according to a report published on Tuesday by the European Central Bank, Reuters and Agerpres reported.

The European housing market is under pressure after the ECB significantly raised interest rates, which are now at record highs, and the economy is slowing.

The ECB’s report examines threats to financial stability, highlighting serious concerns about the effects of the housing boom that is currently causing problems in countries such as Germany and Sweden.

According to the ECB, commercial real estate prices have been affected by economic weakness and rising interest rates over the past year and pose a threat to the profitability and business model of the banking sector.

The real estate sector is waking up to a different reality after the “boom” period in the EU

The eurozone’s commercial real estate sector is not large enough to pose a systemic risk to lenders, but it could exacerbate shocks in the financial system and deeply affect financial companies, from investment funds to insurance companies, including shadow banking.

“While the relatively limited size of commercial banks’ real estate portfolios means that a systemic crisis is unlikely, these developments could play a significant amplifying role in the event of broader market pressures,” the ECB’s Financial Stability Report said.

Home mortgages make up about 30% of banks’ loan portfolios, while commercial real estate loans make up almost 10%.

“The negative evolution of these loans will lead to large losses in other parts of the financial system, such as investment funds and insurance companies,” the ECB warns.

Against the background of low interest rates and large-scale injections of liquidity by the ECB, billions of euros have been invested in the real estate sector over the past decade, especially in rich European countries such as Germany, France and the Netherlands.

The rapid rise in inflation over the past two years has forced the ECB to raise interest rates, halting the rise in property prices, forcing many property developers into bankruptcy. Banks in the euro zone have reduced access to loans, especially mortgage loans, and demand from households and companies is decreasing, ECB data show.

The ECB fears that some banks are not sufficiently prepared for a shock

Last month, the European Central Bank asked property appraisers to explain the methodology they use, amid growing concern that the region’s banks are too slow to write the value of commercial real estate loans onto their balance sheets.

The sharing of information in recent months is part of a broader ECB effort to identify potential bank strikes, according to some of the sources, who spoke on condition of anonymity.

Although banks have built up provisions for possible losses on commercial real estate loan portfolios, it is possible that banks will suffer additional losses if the valuation assigned to those portfolios turns out to be outdated, the sources said.

Over the past decade, some banks have turned to commercial real estate lending to boost revenue as negative interest rates have eroded their profitability.

But the asset class has been hit by the expansion of home working and online shopping during the pandemic, and the rapid rise in interest rates over the past year has further dampened demand for commercial real estate.