Access to housing through bank credit (i.e. trying to buy a house) is becoming increasingly difficult and at the end of 2022 was at its worst level in almost two decades, according to a study by Banco de Portugal (BdP). Ditto via leasing, the Bank concludes in the autumn economic bulletin published on Wednesday.
And according to the governor, Mário Centeno, the situation is likely to worsen before it eases. “The transmission of monetary policy normally takes place with a lag of twelve to eighteen months,” meaning that the impact of the increases in official interest rates “that have already occurred” “has not yet had a full impact on financing conditions and so on the economy,” Centeno warned at the press conference during the presentation of the new bulletin.
If it takes 18 months, as many past cases show, it means that those in debt will still feel the impact of current interest rate increases within a year and a half (mid-2025).
Therefore, Centeno continued, “we must be careful about the decisions we make in the near future; inflation falls and even with stable nominal interest rates [a partir daqui] This means that real interest rates will continue to rise,” in other words, “the financial pressure is not yet complete” and will continue for many months, the governor warned.
And this shock could be even faster (and therefore more violent) than that typified in the BdP models, because in Portugal the taking out of loans at variable interest rates is the majority and dominant, and therefore the transmission of the monetary impact of the policy on the economy. The final financing costs to be borne by households (and businesses) are more dramatic and sudden, Centeno points out.
According to the BdP, the above-mentioned access to housing is special and much more difficult at this stage (the analysis by the Bank’s economists will be carried out until the end of 2022) because house prices have soared and are unstoppable. At the same time, this coincided with the cycle of worsening interest rates, which started in the middle of last year. The ECB’s policy rate was 0% in July 2022 and is already 4.5% today.
Centeno says it’s possible that, based on what’s known now about inflation and the rest of the economy, interest rate increases could even stop for a while. For how long, we don’t know. It depends on the high inflation whether it wakes up again or not.
But the problem of access to housing does not stop there, it is worse: by making this access through credit even more difficult, the BdP notes that the nominal disposable income of an individual (who has to bear the annual costs with a mortgage of one year) ) house of 112 square meters) is growing slower than the above-mentioned supply-side costs (the price of the house and the interest costs), further increasing the degree of inaccessibility that is currently spreading.
According to the BdP, “the level of the effort indicator was low in the period between 2015 and 2019 and showed a deterioration from 2019 onwards. At the end of 2022 it stood at high values, around 11% above the maximum levels observed in 2007-2008”, i.e. worse than the initial financial crisis that shook global credit markets and led to the failure of several banks, starting with the giant Lehman Brothers, in 2008.
“The variation in the accessibility indicator can be decomposed into the individual effect of the amount, interest and income. Between 2016 and 2019, the measure of housing accessibility through credit remained relatively stable, with the impact of rising house prices having to be offset by the reduction in interest rates and growth in disposable income.”
“There has been a deterioration in accessibility in the recent period due to the combination of the continued rise in house prices and the cycle of rising interest rates, despite nominal income growth,” the same study describes.
It is comparable with leasing. The inaccessibility indicator deteriorated significantly through 2021, although it temporarily declined in mid-2022 due to an increase in income (government support and inflation effect).
But at the end of last year, rents again became more inaccessible to the average person considered by the BdP.
“The accessibility of housing through rental can be assessed based on the ratio between rental prices for new contracts and disposable income. Like house prices in Portugal, rental prices have also proven to be very dynamic, with annual growth of around 8% in the period 2021-2022. This increase contributed to a deterioration in accessibility via rental in 2021, but was largely offset by the increase in nominal disposable income in 2022,” the BdP notes.
“The Great Delay”
In the presentation, Centeno said that “what remains of 2023 and the year 2024” will be marked by a “major slowdown” in growth and external demand, which is expected to grow by only 2% on average (until 2025). The ECB’s policy has the desired effect: by significantly cooling activity and lending, inflation is low, the former finance minister explained.
Centeno found that “we now have lower growth than in 2021 and 2022, a normal and expected evolution, but already clearly characterized by the monetary policy cycle and financial tightening.”
In fact, the national economy will have already suffered an initial contraction in the third quarter that ended last September, the BdP shows.
On an annual basis, real gross domestic product (GDP), that is, excluding the effect of inflation, would increase by only 2.1% in 2023, 1.5% in 2024 and 2.1% in 2025 , according to the BdP. About three months ago the Bank forecast 2.7%, 2.4% and 2.3% respectively.
Inflation was revised slightly upwards compared to June, but continues to slow. “Inflation is expected to continue to decline, with projected annual variations of 5.4% in 2023, 3.6% in 2024 and 2.1% in 2025.”
Centeno praised the resilience of the labor market, which is keeping the economy and incomes afloat, providing the government with vital tax revenue to make its budgets “brilliant.”
However, the governor warned that the “dyke” that the labor market has proven could also become “the first domino to fall” if there is no common sense and “moderation” in labor rules and wages, he opined.
Dinheiro Vivo journalist
Source: DN
