Household Lending at Eight-Year High

11 October 2018

The risk of a repetition of the crisis of 2008 is worrying regulators who are seeing warning signs due to the level of credit granted in the first eight months of the year, the highest in eight years.

The flow of loans to Portuguese households is at an eight-year high. Data from the Bank of Portugal show that the country’s financial institutions had already granted 6.503 billion euros in mortgages (half of the amount loaned in 2007 and growing at an accelerated pace), plus another 3.132 billion euros in consumer loans (above 2007 levels, the year before the global financial crisis), the Jornal de Negócios reported on Thursday.

The level of loans is sounding alarms in Portugal’s central bank and other supervisory entities, which see similarities with the levels of indebtedness that preceded the crisis in 2008. One of the most recent alerts came from the Assistant Secretary of State and Finance, who stated that “credit to individuals, especially consumer loans, should be closely monitored to avoid recklessness, as has occurred in the past.”

That warning was reinforced by the governor of the Bank of Portugal, who focused his concern primarily on mortgage lending. “This data is particularly relevant when we see evidence of euphoria in the market, especially in the residential and mortgage market,” Carlos Costa warned.

The Bank of Portugal announced a series of preventive macro-prudential measures which came into force last July. The recommendation require financial institutions to set limits on the concession of new loans. Those limits include the definition of a maximum term, effort rate and loan-to-value.

Another factor influencing the regulators’ view of the market is the reversal in the downward trend for outstanding mortgage loans, which started in 2011. In August of this year, outstanding loans reached €92.86 billion euros, below the 97.957 billion euros in August 2007. The current level of consumer loans has surpassed the pre-crisis high: €14.762 billion in August 2018. 11 years ago the total had reached €12.18 billion euros.

Original Story: Observador

Photo: João Porfírio / Observador

Translation: Richard Turner