After four months of war in Ukraine, at one time Swelling Reaching its highest level in decades, Banco de Portugal (BdP) raises the tone of its warnings regarding the risks to financial stability. Among the major risks is now the possibility of a “significant correction in residential property market prices”, which, if confirmed, will have a direct impact on banks’ balance sheets.
Most recently Financial Stability ReportRelated to June 2022 and released this Friday, the BdP acknowledges the major risks and risks to financial stability, “the risk of falling prices in the residential real estate market as a result of changes in financial conditions”.
This danger is pointed out at a time Interest rates will rise again, At historically low and negative levels after many years, which raises the price of credit. At the same time, this time, the Housing prices continue to rise rapidly, As a result of increased demand for housing, especially non-residents, and the persistent shortage of supply. In the first quarter of 2022, home sales prices in Portugal increased by 12.9% compared to the same period last year, according to the latest data from the National Statistics Institute (INE).
In this context, the BdP considers that “domestic bank lending has not been a major factor in the rise in home prices in recent years”, but this is a situation that could change and needs to be monitored. “Against the backdrop of the recent high growth in home loans, it is important to ensure that it does not play a decisive role in the evolution of prices in the real estate market,” the report said.
“Adoption of the macroprudential recommendation for new loans has improved the risk profile of borrowers and the characteristics of the home loan portfolio,” the regulator emphasized. Finally, it recognizes that “the debt-to-value ratio of the mortgage loan portfolio represents a setback for a revision in residential real estate.”
Nevertheless, there is risk and it deserves an extended analysis by the BdP. Based on the statistical model that analyzed the distribution of change in house prices in Portugal in 2021, the regulator points out that due to the financial and economic conditions prevailing in that year, housing prices are expected to worsen from 2023 to 2024 in the federal system. Predicts that.
“The current situation and this analysis justify the need to constantly monitor the risks to the residential real estate sector, in particular, in the context of the normalization of monetary policy and the dynamic stability of the growth of housing prices,” the BdP concludes.
The financial situation of the family may deteriorate
Along with the risk of correction in real estate prices, as a result of rising interest rates and inflation, the financial situation of households is deteriorating, which could lead to an increase in loan installments.
“In the current macroeconomic and geopolitical environment, the expected increase in market interest rates could worsen the financial situation of individuals and increase the risk of default,” the BdP acknowledged. “In Portugal, the variable rate of home loans is 90%, which has led to an increase in market interest rates, resulting in an increase in debt service. The most common index is the 12-month euro war. Added with effect, ”he added.
Nevertheless, the regulator emphasizes that “there are factors that mitigate the default risk of individuals”, which highlights the reduction in debt seen in the pre-epidemic period and across families with different income levels. At the same time, there was an “improvement in the risk profile of new borrowers as a result of the macroprudential recommendation”.