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IMF tells Spain to keep an eye on rising housing prices

The organization is not seeing signs of a new bubble, but wants tools in place to keep credit in check if necessary

A residential development in Sant Just Desvern, Barcelona.
A residential development in Sant Just Desvern, Barcelona. EL PAÍS

The International Monetary Fund (IMF) is calling on Spain to monitor the price of real estate following a rebound of the property market after years of crisis. After analyzing late 2017 statistics, the global agency has detected early signs of “a slight overvaluation,” although it stressed that there is still nothing like a new housing bubble in Spain.

The IMF has been telling Spain for years to create an agency to monitor systemic risks

“Even though there is no clear evidence so far of a generalized house price overvaluation, it is critical that the Bank of Spain has a comprehensive toolkit at its disposal so that it can act promptly should misalignments emerge,” says the IMF in its annual report on Spain.

“House prices have increased in recent years, although from a low level and without signs of a construction boom. While there is no clear evidence of a significant price misalignment yet, the authorities need to be vigilant. The set of macroprudential tools should be expanded to deal with potential financial stability risks,” write the analysts in a side box to the report titled “Developments in the Housing Market: Already a Cause of Concern?”

The IMF finds that house prices increased by around 15% between 2014 and 2017, but that sales are being driven by existing housing stock rather than new housing. Another change from pre-crisis days is that the home ownership rate has dropped from 80% to 77% as people increasingly turn to the rental market.

The economy is showing nothing like the kind of effervescence that once drove the speculative debt bubble

The Spanish economy is showing nothing like the kind of effervescence that drove the speculative debt bubble prior to 2008. Rising home prices are not being matched by a rise in credit flows. Private debt levels are not growing and the exterior balance is positive. Gone are the days when Spain was borrowing around €100 billion a year, fundamentally to fund the purchase of overvalued homes.

But analysts are nevertheless concerned about the new upward trend of housing prices, which could lead to excessive trust and a relaxation of loan-application requirements and building criteria. Additionally, household savings levels are at historic lows as homeowners believe themselves to be wealthier.

“One should never underestimate the speed at which these processes gain traction,” said a high-ranking government official.

The IMF report notes that “banks are highly exposed to real estate sector developments, and therefore the macroprudential toolkit should be expanded to deal with risks associated with that exposure.”

One should never underestimate the speed at which these processes gain traction

Government official

This means that Spanish supervisors should be granted new powers to limit mortgage approvals based on the value of the home, the borrower’s income or the payment deadlines. The Socialist Party (PSOE) administration of Pedro Sánchez is currently working on a decree to give the Bank of Spain these powers.

The IMF has been telling Spain for years to create an agency to monitor systemic risks, or in other words, to assess financial hazards in order to prevent imbalances and bubbles. And now that the property market is picking up speed again, there is an added sense of urgency.

The previous Popular Party (PP) administration delayed the creation of this oversight body, but current Economy Minister Nadia Calviño has a blueprint on her desk for an agency that would bring together the Bank of Spain, the CNMV national securities watchdog and the Economy Ministry. Under the proposed terms, the Bank of Spain would gain the power to rein in the concession of loans and tighten conditions for mortgage approvals.

English version by Susana Urra.

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