IMF warns that house prices in Portugal are overvalued

Written By Manuel Poças

The International Monetary Fund (IMF) warns that house prices, in Portugal, are overvalued by 20%.

Even though prices dropped slightly, the IMF warns that houses are overvalued by 20% and that the banks should prepare for the risk of non-compliance and the existence of non-performing loans (NPL’s).

In an interview given to the Portuguese agency ‘Lusa’ during the IMF’s annual meeting, the Fund’s Director for Europe (Alfred Krammer) stated that this tendency can be observed in more than two European housing markets and that it creates risks for financial stability.

Because of the impacts of COVID-19 and the war between Russia and Ukraine, prices have been increasing. These impacts led to a decrease in the supply, an increase in construction prices, licensing restrictions, and inflation, which resulted in a steady increase in the banks’ interest rates.

According to Krammer, Portuguese banks are solid. However, they should prepare for how mortgage holders will be affected in terms of available income. In Portugal, 90% of mortgages have variable interest rates. Thus, banks should prepare for more difficulties.

The recommendation is that the financial institutions create a safety net for the sectoral systemic risk. This will allow banks to have a bigger margin for dealing with households that are becoming more, and more, at risk of non-compliance.

The Director also recognized the ongoing housing crisis. According to him, the most worrying is the accessibility to housing and the possibility of renting. A problem that the current measures created by the Portuguese Government will not be able to solve.

In accordance with the statement, the existing measures are only provisory and do not constitute a viable long-term solution for the problem that exists today. They are unsustainable in the long run and, because of that, should be temporary and target the most vulnerable.

In the Director’s words, “It is the housing supply that has to increase, and that means social housing.” The Government must address the accessibility to housing and to the possibility of renting. It must protect the most vulnerable, which are becoming more in number, and in the degree of vulnerability. 

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