The overvaluation of house prices in Portugal is breaking records and is comparable to the phenomenon that also affects other countries of the European Union (EU), especially the richest, including some Scandinavian states such as Sweden or Denmark, the European Commission (EC) reveals in a statement comprehensive study of macroeconomic imbalances in the EU.
According to Brussels, we are talking about overvaluations of average house prices of around 20% or more, a situation that affects economies such as Sweden, Austria, the Czech Republic, Belgium, Portugal, the Netherlands, Germany and Denmark. The most atypical case is that of Luxembourg, where housing overvaluation is already over 60%, the EC indicates.
In Portugal, the problem is particularly serious, taking into account that it is a poorer country and with the characteristic that loans for the purchase of a house are largely indexed to floating interest rates [que com fim de um ano são atualizadas, por exemplo] which, in the current context of rapid rate hikes by the European Central Bank (ECB).
This deteriorating cost of money in the Eurozone could put significant strain on the budgets of many Portuguese households indebted to purchase a home. The Commission warns Portugal directly about this last point.
As part of the macroeconomic and budgetary assessment of the European Semester (new cycle for 2023) published this week, Brussels notes that “in 2021, the growth of deflated house prices [descontando o efeito da inflação, portanto o crescimento real, por assim dizer] passed the 6% threshold in 14 Member States: Austria, Czech Republic, Denmark, Estonia, Germany, Greece, Hungary, Latvia, Lithuania, Luxembourg, Netherlands, Portugal, Slovenia and Sweden”.
In addition, “house prices in the second quarter of 2022 still accelerated and grew by more than 20% in nominal terms compared to the same period of the previous year in the Czech Republic, Estonia, Lithuania and Hungary”.
“In 12 other states – Austria, Bulgaria, Croatia, Germany, Ireland, Latvia, Luxembourg, the Netherlands, Poland, Portugal, Slovakia and Slovenia – the nominal price increase was between 10% and 20%”.
This inflation of house prices allows the EC to establish a reference value, to calculate a benchmark, ie a value for the intended phenomenon of average overvaluation that affects each of the national markets.
Portugal leads, it is in the group of the most overvalued. “Member States with more than 20% overvalued house prices are Austria, Belgium, the Czech Republic, Denmark, Germany, Luxembourg, the Netherlands, Portugal and Sweden,” says Brussels.
In addition, the EC warns that “in Portugal, two-thirds of mortgages have a fixed-rate period of only one year, while the remaining mortgages mostly have a fixed-rate period of one to five years”.
If now the majority (around 66%) of home loan contracts are revised (updated) after one year, this will significantly increase the said exposure of Portuguese borrowers to the ECB rate hike until inflation in the Eurozone (above 10% today) returns to the desired 2%.
After being at 0% for more than six years (from 2016 to mid-2022), the ECB began tightening money and key refinancing rates (the fees charged to commercial banks in the Eurozone when they seek funds which are normal for the ECB) has already risen to 2%. And it will certainly rise much more, driving up the euribor, the main rates used to calculate the monthly installments that individuals and businesses have to pay to banks.
In addition to Portugal, the Commission warns two more countries about this vulnerability. “In France and Sweden, household debt is above prudential levels, household creditworthiness is high and household debt is estimated to be higher by the end of 2022 than in 2019.”
In the case of France, “most mortgages have a fixed interest rate”. In Sweden, “more than two-thirds of mortgages have variable interest rates with a fixed term of only one year, exposing households more to the risks of higher bank repayments due to higher interest rates,” notes the Sweden-based director. In Brussels.
Breaking down the Portuguese case
Returning to the Portuguese case, the Commission says that “in Portugal, concerns about debt ratios of households and non-financial corporations, government debt and external debt relative to gross domestic product (GDP) remain, although these ratios have improved post-covid -19 crisis”.
However, “nominal house price growth is accelerating and signs of overvaluation have appeared” in prices charged at the time of sale.
Thus, “risks associated with feedback loops in the financial and public sector also remain”. That is, despite the fact that bad debts are not a serious problem (it is on the decline), if the trend continues, the bank could inherit a new and serious problem arising from a potentially growing stream of defaults.
The reference to the public sector is related to the fact that banks hold huge amounts of government debt. If the interest rates of the Republic rise significantly or if the rating falls, the value of banks’ assets (e.g. treasury bills) will depreciate and this will negatively affect the balance sheet. That’s the idea behind the concept of “feedback”.
In short. In this European Semester, the Commission recalls that in the previous round of the Macroeconomic Imbalances Procedure [onde está contido este problema do crédito e das casas]the Commission carried out an in-depth investigation and concluded that Portugal was experiencing macroeconomic imbalances”.
Taking into account that the situation has not improved (on the contrary), “the Commission considers it appropriate this year to examine the persistence of imbalances or their evolution in a more in-depth review, in the case of Portugal”.
“Concerns about house price evolution are mounting. Nominal house price growth accelerated from 8.8% to 9.4% in 2021”, “annual nominal growth accelerated to 13.2% in the second quarter of 2022″ and prices are overvalued by about 23% (2021)”.
And “with more than two-thirds of mortgages indexed at interest rates up to just one year,” repeats Brussels.
Dinheiro Vivo journalist
Source: DN
