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Climbing Home Prices Cause Value of New Loans to Hit Record
25 April 2018
The average amount of new outstanding housing loan contracts amounted to approximately €96,300 in March. It is the highest value in almost a decade.
Whoever wants home often wants a loan too … and also more and more money. The average value of new housing loans in Portugal is closing in on 100,000 euros, a level never before achieved. The rise in property prices justifies, to a large extent, this phenomenon, which is also fueling the banks’ appetite for granting such loans at a time when the Portuguese are increasingly confident in the state of their economy.
Data released by the National Institute of Statistics (INE) show that the average amount of newly issued housing loans – that is, in the last three months – amounted to 96,297 euros in March. This is the highest amount since at least January 2009, the period immediately preceding the beginning of the crisis that would eventually lead to a bailout for Portugal.
This average amount corresponds to almost double the average size of the totality of outstanding mortgages in Portugal. In March, this amounted to 51,770 euros. It has remained almost unchanged, with the increasing rate of amortisation of the older loans being offset by the high amounts ceded by the banks in the most recent contracts.
In practical terms, what the INE’s data show is that Portuguese households are increasingly asking for money from banks when they want to buy a home. Much of the responsibility for this reality is, according to experts, in the escalation of real estate prices in the domestic market.
“Comparing the data on the evolution of new loans with that of the housing price index, we can see a near perfect correlation.”
Filipe Garcia – IMF
“The main factor that explains the evolution of the data is the rise in housing prices, Philippe Garcia, chief economist of the IMF stated. His opinion is shared by Nuno Rico, an economist at Deco who says that “the rise in real estate prices causes families to resort to higher and higher amounts of credit.”
“Comparing the data on the evolution of new loans with that of the housing price index, we can see a near perfect correlation,” Mr Garcia added, in support of his conclusion.
Outstanding loans at a ten-year high
In fact, it is enough to put the graphs that show the evolution of the outstanding capital of the new loans for home purchases next to the index that shows the evolution in housing prices in the same period to note this “coincidence.”
The housing prices in Portugal are also at a ten-year high. Last year, the price increase reached 10.5%, the second largest in the eurozone.
Evolution of housing prices
However, these two trends are accompanied by another: an easing of credit by the banks, in general terms, which have been continuously loosening their purse strings with each operation they finance. Mr Garcia explains that the banks are “approving credits for an ever-greater percentage in relation to the associated valuations.” In the period of the crisis, banks hardly financed more than 50-60% of the property valuation. Today, it is already possible to see some operations being 100% financed in some cases.
The real estate valuations for housing loans – which are at a post-2010 high – attest to this reality. “We have an increase in valuations and prices and an increase in the percentage of the number of transactions that banks approve,” Filipe Garcia stated, explaining that the whole scenario supports an increase in the value of home financing.
A threat around the corner?
According to experts, this situation poses a threat to Portuguese families. “Banks are re-assuming housing lending risk, which could see an increase in defaults when interest rates rise again, or there is a recession,” notes the IMF economist, adding that “for buyers, this is a warning sign because it means that mortgage instalments are, on average, higher and can lead to difficulties when interest rates rise.” This despite his belief that “banks seem to be acting more prudently.”
Deco also shares the IMF’s concerns, with Nuno Rico highlighting two types of risks. “First of all, the amount of debt itself, since we are talking about fairly significant amounts and they are increasing. A second factor, linked to this, has to do with the fact that the interest rates in the contracts made in the last three months are much higher than those of the debt stock in general,” he stated, adding that, in this context, a small change in the [interest rate] indexes could create “very significant difficulties” for families.
“They are not only taking on higher amounts of credit, but also at higher interest rates, and although there has been a recovery in incomes in recent years, it is not comparable to rising real estate prices,” the consumer association’s economist reasoned.
All this happens in a scenario in which, although they have not yet fully recovered their pre-crisis income-levels, Portuguese families are more confident about the economy and their financial commitments, particularly with the banking sector. It should be noted that Portugal’s GDP last year saw the highest growth of the century.
Original Story: Economia Online – Catarina Melo
Translation: Richard Turner