Foreigners buy 4 out of 5 houses in the Algarve

Houses in Portugal 20% overvalued warns IMF

“Banks should prepare for possible risks related to defaults”

The International Monetary Fund (IMF) estimates that house prices in Portugal are overvalued by 20% – although they are falling – and warns that banks should prepare for possible risks related to defaults on mortgage loans, writes Lusa.

The position was expressed by the IMF’s director for Europe, Alfred Kammer, in an interview with Lusa in Brussels on the occasion of the Fund’s annual meeting.

Pointing out that the overvaluation of homes is a similar trend to that registered “in several European property markets”, Alfred Kammer stressed there is now “a slowdown in house price growth, but also a risk that the correction in property prices could be faster”.

Due to the impacts of Covid-19 and the war in Ukraine, house prices in Portugal have been rising sharply, ‘pushed’ by the lack of supply, rising construction costs, restrictions on licences and the inflationary context, he said.

High inflation has led to successive interest rate rises in recent months, in a tight monetary policy carried out by the European Central Bank (ECB) to reach 2% (when it is now around 4% in the eurozone and a little less in Portugal) to guarantee price stability.

In the interview , Alfred Kammer warned of “the risks to financial stability.

Banks in Europe and Portugal are solid, but they must prepare for these cases, where mortgage holders will be affected in terms of income.

“In Portugal, interest rates reach borrowers quickly, since 90% of (mortgage) loans are variable and floating interest rates, so banks must prepare for more households in difficulty,” he said, adding: “Our recommendation for Portugal is to create a ‘cushion’ for the banks’ sectoral systemic risk so that they can secure some capital to deal with families when they get into a dangerous situation”.

The banking sector’s profitability continued to rise in the first half of the year, according to data from the Bank of Portugal, which also indicates an increase in credit at risk in housing in the second quarter of this year.

Alfred Kammer recognised the housing crisis in the country, considering that “the most worrying thing is the affordability of housing and renting”.

“It’s a problem because we will actually have growth effects. We see, for example, young people who can’t afford to rent houses in urban centres, (…) and that’s a wider social and (…) issue across Europe,” he concluded.

The IMF director also admitted that Portugal could be one of the eurozone countries most affected by the rise in interest rates because “it has a high ratio of mortgages with variable interest rates”, which means that “the transmission of monetary policy is faster”.

This comes after the Portuguese government approved a new mechanism at the end of September to guarantee stability for families, extending the interest subsidy and prolonging the suspension of repayment fees.

Legislative changes have been approved in parliament with regard to renting, local accommodation, vacant properties and taxes, Lusa concludes.