BdP Threatens to Tighten Access to Housing Loans

7 December 2017

The real estate market is hot. It’s the same with credit for housing loans. The Banco de Portugal (BdP) is concerned about the pace of lending and has already warned banks to avoid exposing themselves to a future crisis. The institution has asked the banks to take greater care, admitting the possibility of adopting measures that would tighten access to housing loans.

“Price developments in the real estate market may pose risks to financial stability as they lead to a relaxation of the criteria for granting housing loans in a context of high household indebtedness,” said the BdP in its recently released Financial Stability Report.

Portugal’s bank

The banking regulator wants to prevent banks from reliving the problems they faced just a few years ago with non-performing loans. According to the BdP, “there is a significant percentage of households with very high indebtedness relative to their income”, which will put them in a “particularly difficult situation if they suffer any cuts to their income or an increase in interest rates.”

“It is important to ensure that the current dynamics of housing and economic credit, in particular the real estate market, do not, on the one hand, compromise the process of reducing the still elevated private indebtedness ratio and, on the other hand, do not promote the accumulation of excessive risk on the banks’ balance sheets and an excessive allocation of economic resources to the real estate sector,” the regulator warned.

BdP considers adopting restrictive measures

The BdP’s concern comes through very clearly in the statement accompanying the Financial Stability Report, where the banking regulator states that “it is essential that financial institutions continue to properly and proactively assess borrowers’ creditworthiness while avoiding excessive risk-taking in approving new credit flows, particularly in housing loans. ”

The institution led by Carlos Costa goes further and admits that it is “considering taking measures to strengthen the assessment by credit institutions of private borrowers’ creditworthiness.” The measures were not disclosed, but the supervisor could ask the banks for to reduce their maximum effort rate and request more collateral, considering the possibility of future interest rate hikes.

The report also reveals that, in the first quarter, new home loans increased by around 40% year-on-year and the percentage of homes purchases that were financed by bank loans increased to 45% compared with a low of 20 % in 2013 (65% in 2009). In September, of the total of 115.106 billion euros that the banks had granted to individuals, about 81% (93.568 billion euros) were for housing.

Original Story: Idealista

Translation: Richard Turner

Photo: Shuttersnap / Unsplash