IMF warns: house prices in Portugal are overpriced by20%

The International Monetary Fund (IMF) estimates a 20% overvaluation of housing prices in Portugal, despite their decline, and warns that banks should prepare for potential risks related to mortgage defaults. This was stated by the IMF's Director for Europe, Alfred Kammer, in an interview with the Lusa agency in Brussels in connection with the Fund's annual meeting.

He noted that such a trend is observed "in several European real estate markets," and added that "there is currently a slowdown in housing price growth, but there is also a risk that the correction in real estate prices may happen more quickly."

Due to the impact of Covid-19 and the war in Ukraine caused by Russian aggression, housing prices in Portugal are sharply rising due to a lack of supply, increased construction costs, restrictions on issuing permits, and the inflationary context.

This high inflation has led to a series of interest rate hikes in recent months as part of the strict monetary policy implemented by the European Central Bank (ECB) to achieve a target of 2% (while currently they 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 in Portugal are strong, but they need to prepare for situations where mortgage loans affect incomes. He emphasized that "our recommendations for Portugal include creating a 'buffer' for sectoral systemic risk in banks, so they can ensure capital to support families when they find themselves in a precarious situation."

Kammer also acknowledged that Portugal could be one of the eurozone countries most affected by rising interest rates due to its "high share of variable-rate mortgages," which makes the transmission of monetary policy more rapid.

The measures to ease interest rates are temporary and do not solve the housing crisis. During an interview, the IMF described the government's measures to mitigate the impact of interest rates on mortgage loans as "temporary" and not addressing the housing crisis, urging that they be made temporary and targeted at vulnerable citizens.

He noted that "it is necessary to increase the supply of housing, including social housing, but not only that." "This is also reflected in rental prices and the cost of renting, which excludes some people from the housing market, especially young people and city residents," Kammer added. He emphasized that "the government must protect the vulnerable, but at the same time be very aware of the budget costs" for these initiatives.

At the end of September, the government approved a mechanism allowing families to request banks to fix their variable-rate mortgage payments for two years. The decision includes a reduction in payments, ensuring that the implied interest rate does not exceed 70% of the six-month Euribor. Additionally, the measure in place since March to support interest subsidies has been modified, increasing the maximum annual amount of this support from 720 to 800 euros, with the subsidy calculated based on the value of the index (Euribor) above 3%.