Real house prices in Portugal have doubled since 2015

House prices in Portugal have doubled since 2015, the IMF warns.

In a regional report on Europe, the International Monetary Fund (IMF) notes that real estate markets across the region are showing increasing signs of overvaluation, citing five countries as examples of this scenario.

“Real house prices have doubled since 2015 in the Czech Republic, Hungary, Iceland, Luxembourg, the Netherlands and Portugal,” the report reads.

IMF technicians underline that “since the pandemic, the disparities between house prices and incomes, and between house prices and rents, have widened even further”.

According to the accounts of the Bretton Woods Institution, house price-to-income ratios are currently more than 30% above long-term trends, while house price-to-income ratios “also far exceed historical norms, including in economies of Northern Europe or emerging European countries.

In this sense, the IMF indicates that empirical models point to 15-20% overvaluation in most European countries, but with bank rents still rising and real incomes being hurt by inflation, “housing prices have recently many markets down”.

In the same analysis, he also points out that the rise in the cost of living and bank payments on houses “stretch” household equilibrium, which could worsen even more if there are more adverse shocks.

In adverse scenarios with a higher cost of living and higher benefits, about 45% of households – and more than 80% of low-income households – could experience greater economic hardship.

Still, the IMF believes that “the impact on bank balance sheets in general should be limited”, but believes that this “picture is darkened by a combination of shocks, including a major house price correction”.

“Below the benchmark (Common Equity Tier 1), the fall in equity from rising household defaults would not exceed 100 basis points in most countries, but a 20% downturn in the housing market would increase losses to a range from 100 to 300 basis points, with the countries of Southern and Eastern Europe the hardest hit,” he added.

In this scenario, such losses could lead to tighter credit conditions, increased assumptions and unfavorable cycles between bank balance sheets, house prices (and other assets) and the real economy.