2022 might turn into the year not just of European covered bond harmonisation but of record issuance volumes too. On the housing front, prices in Sweden have seen their biggest slump since the GFC amid uneven price developments across Europe.

Europe’s house price rally has been unscathed so far by economic and geopolitical events. Average annual growth was 12.9% in Q1 2022. But while house prices have continued to increase across the board, some divergence in growth rates is emerging.

German mortgage rates have risen to levels not seen in a decade. We discount a collapse in house prices though this will depend on the economy. If banks allow buyers to max out their debt capacity with riskier debt, prices could even be further stretched.

Austrian covered bonds can be rated up to nine notches above issuer ratings, six notches of which stems from better governance support, which is driven by higher systemic importance, stronger cohesiveness and the new legal framework taking effect in July.

Exemptions included in the set of macroprudential measures proposed by Austria’s Financial Market Authority to address risks in the housing market are too generous and do not tackle the risk of higher interest rates. Legislative adjustments are needed.

Over EUR 85bn of covered bonds have been issued year-to-date, the most in more than a decade. Covereds are once again the go-to funding tool in a crisis. Senior unsecured funding shut for a while and wider spread differentials added to their appeal.

The methodology update contains only editorial changes and clarifications.

The house price rally goes on, but recent rate increases are making mortgages a luxury. This is affecting demand and, by extension, house prices. Declining affordability among European households will likely halt the rally for the time being.

Bafin’s introduction of a systemic risk buffer highlights risks in the German housing market and was a step in the right direction. However, direct, borrower-based measures are better suited to avoiding risks crystalising when interest rates rise.

We do not expect new credit trends to emerge in 2022. It is more about nuances and if and when current unknowns take centre stage. Subtle spread differentiation will emerge but only when policy rates normalise and the market returns to a new normal.