The work presents an update of the analytical framework to assess financial stability risks arising from the real estate sector in Italy. The enhancement involves the definition of a new vulnerability indicator, measured in terms of the flow of total non-performing loans (NPLs) and not in terms of bad loans only. Two early warning models are estimated using the new vulnerability indicator for residential and commercial real estate, respectively.
Both models exhibit good forecasting performances up to two years forward of the risks for banks stemming from the real estate market. Based on projections for the fourth quarter of 2019, the new vulnerability indicator is expected to record another small decline to an historical minimum for the RRE sector and to remain unchanged at pre-crisis levels for the CRE sector.