BIS Review 66/2004  5  The concern relates in particular to the likelihood that some households may be underestimating the risks they face. These risks are associated first, with the higher sensitivity of households to changes in interest rates. In this regard, we have seen a tendency in some euro area countries to increasingly focus on borrowing at conditions which are linked to short-term interest rates. For many households this seems to be an attractive option as it implies a rather low interest rate burden notably at the beginning of the contract. What is often overlooked, however, is the fact that the currently low interest rates could well change over time. A second risk relates to future house price changes. Some valuation measures for property prices, such as the price-to-rent ratio, are now 10-15% higher than their average levels during the period 1995-2003 in the euro area as a whole. These valuation measures have even reached levels as high as 17%. Against this background, concerns have been expressed that substantial house price increases in some countries entail risks of a reversal of this trend that may currently be underestimated. It is not the first time we have been confronted with pronounced movements in asset prices in the euro area. Indeed, current movements in house prices are small when compared to some swings in stock market prices over the last six years. We have witnessed rather substantial share price fluctuations resulting from the new economy euphoria and the subsequent disillusionment.
First, we announced the implementation of the Pandemic Emergency Purchase Programme (PEPP). This programme, with an initial envelope of € billion, which was subsequently increased to € trillion until June 2021, permits the ECB to purchase government and private sector bonds, as well as other debt instruments. The ECB already had a purchase programme, the APP, which increased in volume at the onset of the crisis. Why did it then need a second programme? The APP has a relatively rigid structure regarding the distribution of asset purchases both over time and by jurisdiction. 3  In the latter case, APP purchases are distributed under the so-called “capital key”, a concept referring to the percentage of the ECB’s capital held by each national central bank, which is linked to the weight of each country’s economy and population. However, faced with an emergency such as that in March, the ECB had to be able to buy proportionally more bonds from some countries than others so that it could concentrate those purchases on countries whose financing conditions, at any given time, were subject to a greater degree of tightening. The PEPP was designed precisely with that degree of flexibility in the distribution of asset purchases over time and by geographical area, although the capital key continued to act as a guide for the latter.