The Real Estate Association warns of a20% increase in housing prices in Portugal

The Monetary Fund (IMF) has told banks to prepare for possible mortgage lending problems despite a slowdown in house price growth.

According to the IMF, house prices in Portugal are overvalued by 20%, although they are falling. The organization warns that banks should be prepared for possible risks associated with mortgage defaults.

High inflation and other factors

IMF Europe Director Alfred Kammer, in an interview with Lusa in Brussels at the Fund's annual meeting, said that in Portugal "residential prices are overvalued by about 20%". Kammer noted that this is a trend similar to that observed "in several European real estate markets" and added that there is now a "slowdown in house price growth, but there is also a risk that the correction in house prices could be faster."

Due to the impact of COVID-19 and the war in Ukraine caused by the Russian invasion, housing prices in Portugal are rising sharply due to a lack of supply, rising construction costs, license restrictions and an inflationary situation. This 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 values of 2% (while they are now around 4% in the euro area and Portugal) to ensure price stability.

Risks to financial stability

Kammer warned of "risks to financial stability". He pointed out that "banks in Europe and Portugal are sound, but must prepare for such cases when mortgage borrowers face deteriorating incomes.

Kammer emphasized that their recommendation for Portugal is to create a cushion for the sectoral systemic risk of banks so that they can provide some capital to deal with families at risk. The profitability of the banking sector continues to rise in the first half of the year, as shown by data from the Portuguese Bank, which also points to a rise in problem mortgages in the second quarter of this year.

Housing affordability and rental problems

Kammer recognized the issue of the nation's housing crisis and said "the most concerning thing is housing and rental affordability." "It's a problem because we can run into growth issues. We see, for example, young people who do not have the financial capacity to rent in urban centers, [...] and this is a social and wider problem across Europe," he concluded.

Portugal and the rise in interest rates

The IMF's Europe director also recognized that Portugal may be one of the eurozone countries most exposed to rising interest rates because of its "high ratio of variable-rate mortgages," which leads to faster monetary policy transmission.

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 commission payments. Additionally, at the end of September, amendments to legislation regarding rentals, hotel accommodations, unused properties, and taxes were passed in parliament.