FRANKFURT, May 25 Reuters The euro zone39;s overpriced housing market may sag if mortgage rates rise faster than inflation, exposing debtfuelled bubbles in some countries, the European Central Bank said on Wednesday.

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.

Euro zone house prices have been on a tear for years, even accelerating during the coronavirus pandemic as the ECB39;s own ultraeasy policy pushed mortgage rates below zero after taking out inflation.

The central bank, 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 overvalued on average and up to 60 in some countries, based on the relationship between prices and income.

It warned that home prices could fall by between 0.83 and 1.17 for every 10basispoint increase in mortgage rates after adjusting for inflation.

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.

It warned about a priceloan spiral in some countries39; residential real estate markets.

Slovakia, Estonia and Lithuania were showing the fastest growth in both residential real estate prices and mortgage lending….