Portugal's house prices overvalued by 20%, IMF warns

Despite a slowdown in real estate price growth, the International Monetary Fund (IMF) is advising banks to prepare for possible mortgage loan problems.

The IMF estimates that house prices in Portugal are overvalued by 20%, despite their decline. In an interview with Lusa news agency in Brussels, IMF Europe Director Alfred Kammer said that "housing prices in Portugal are overvalued by about 20%." He also pointed to a slowdown in real estate price growth, but warned of the possibility of a more rapid correction in real estate prices.

Because of the COVID-19 pandemic and the war in Ukraine caused by the Russian invasion, housing prices in Portugal have risen sharply due to a shortage of supply, higher construction costs, restrictions on''licensing and inflationary context.

High inflation has led to successive interest rate hikes in recent months as part of the tight monetary policy implemented by the European Central Bank (ECB) to reach the 2% level (while they are now around 4% in the euro area and Portugal) to ensure price stability.

Kammer warned of "risks to financial stability." He said that "banks in Europe and in Portugal are strong, but they have to prepare for cases like this where mortgage holders become vulnerable in terms of income. In Portugal, interest rates are rapidly affecting those who have loans, as 90% of mortgages have variable interest rates, so banks must''prepare for more families in difficulty'.

He also recommended that Portugal create a "cushion" for banks' sectoral systemic risk so they can provide capital to deal with families at risk.

This position comes after the Portuguese government in late September approved a new mechanism to provide stability to families, extended interest relief and extended the suspension of repayment fees. Parliament also''enacted changes to legislation relating to rentals, hotel accommodations, unused properties and taxes.