Rising interest rates, decreased risk-taking and a slowing economy are weighing on highly indebted commercial real estate firms and households. The rapid transition to higher interest rates and a decreased willingness to take risk means financial stability risks have increased since spring. At the same time, this transition may lead to lower risk-taking and indebtedness in the long run, thus lowering stability risks.
High inflation, rising interest rates and a weaker economic development have meant that financial market participants have been less willing to take on risk. The ongoing war in Ukraine creates additional uncertainty that is impacting financial markets and financial stability. Rising prices and interest rates are also putting pressure on households' consumption capacity and firms' production costs. This has a negative impact on economic development.
"The willingness to take risk has now decreased. This decrease can dampen financial stability risks in the long run, but rapid downturns in asset prices and an economic slow-down mean higher stability risks in the short term. It is therefore important for banks to continue to have large buffers," says Acting Director General Susanna Grufman.
The commercial real estate sector is sensitive to the rising interest rates due to its' high levels of debt. Investors' willingness to take risk has also decreased. As a result, it has become more difficult and more expensive for many commercial real estate firms to refinance their debt. Several highly leveraged commercial real estate firms therefore need to reduce their debt. Such an adjustment is necessary, but it is occurring at a time when the sector is already under pressure. Banks have large exposures to the real estate sector, but they also have substantial capital buffers, which increases the resilience and the capacity to support creditworthy firms.