House prices in Portugal are overvalued by20%, according to the IMF.

As the growth of housing prices weakens, the International Monetary Fund (IMF) is urging banks to prepare for potential defaults on mortgage loans. The IMF believes that housing prices in Portugal are overvalued by 20%, even though they are declining. IMF Director for Europe Alfred Kammer stated that in Portugal, "housing prices are overvalued by about 20%." He noted that this trend is observed "in several European real estate markets." Kammer warned that there is a risk that the correction in real estate prices could happen more quickly, and there is a slowdown in the growth of housing prices.

The impact of the COVID-19 crisis and the war in Ukraine, triggered by the Russian invasion, has led to a sharp rise in housing prices in Portugal, driven by a supply shortage, rising construction costs, licensing restrictions, and inflationary pressures. This high inflation has resulted in a series of interest rate hikes in recent months as part of the European Central Bank's (ECB) tight monetary policy aimed at achieving a 2% inflation target (while current rates are around 4% in the eurozone and Portugal) to ensure price stability. Kammer warned of "risks to financial stability." He noted that banks in Europe and Portugal are strong but must prepare for situations where mortgage borrowers face income issues. In Portugal, interest rates quickly affect those with loans, as 90% of mortgage loans have a variable interest rate, so banks need to prepare for a greater number of families in difficult situations.

The profitability of the banking sector continues to grow in the first half of the year, according to data from the Bank of Portugal, which also indicates an increase in risky housing loans in the second quarter of this year. Kammer acknowledged the housing crisis in the country and believes that "the most concerning issue is the affordability of housing and rentals." He concluded that this is a problem as it has implications for growth. He pointed out that young people, for example, do not have the financial means to rent housing in city centers, and this is a social issue that is more widespread across Europe. The IMF director for Europe also acknowledged that Portugal could be one of the eurozone countries most affected by rising interest rates, as "it has a high percentage of variable-rate mortgages," leading to a quicker transmission of monetary policy. This position emerged after the Portuguese government approved a new mechanism at the end of September to ensure family stability, expanded interest subsidies, and extended the suspension of repayment fees. Changes to legislation regarding rentals, short-term accommodations, vacant properties, and taxes were also adopted at the end of September.