The Bank of Spain focuses on the real estate sector


The rise in mortgage credit in Spain was significant in 2021, with year-on-year rates above 40%. Although the risks associated with this boom seem to be under control, certain entities have pointed out the need to put this market under surveillance, among which is the Bank of Spain.

The BdE pointed out the importance of once again focusing on housing in order to exhaustively monitor its evolution given what is being seen in other countries of the community: soaring credit and double-digit price growth.

The entity also referred to the weight of exposures linked to the real estate sector in banks and the existence of shared factors that explain the evolution of housing prices in the region.

Possibility of contagion of imbalances

The BdE also highlighted the risk of generating a kind of contagion or transmission of the imbalances suffered by some countries in the area, which could also be a source of great risks for the Spanish banking sector.

The monetary authority indicates that there are no signs of the application of lax granting criteria in loans, but the possibility of a certain transmission of the effects of real estate imbalances within the euro area represents a significant source of risk for the Spanish banking sector .

According to the report, the growth of new mortgage credit in Spain was especially significant in 2021, with year-on-year credit growth rates above 40% in the final part of the year.

However, the body points out that, due to the low levels from which it started, the ratio of the annual flow of new credit over GDP remains in line with that of the rest of the countries of the euro area in which the European Board Systemic Risk Assessment (ESRB) has not found any systemic real estate imbalances.

Rise in property prices

Despite the strong economic contraction that occurred as a result of the pandemic, house prices continued to grow throughout 2020 in the euro area, and this advance intensified in 2021.

The growing trend observed in prices is somewhat more intense in the group of countries that received alerts and recommendations from the European Systemic Risk Board, although in the second half of 2021 an increase in the rate of increase in prices in the rest of the economies, including Spain.

Regarding the situation of total mortgage debt, most countries have experienced slight increases in the ratio of the total balance of mortgage credit to GDP since the start of the pandemic. Among them, it is worth distinguishing between the countries whose ratio has increased as a result of the accumulation of debt, and those in which this increase is mainly due to the drop in GDP generated by the pandemic, as is the case of Spain.

Synchronization of markets in Europe

The Bank of Spain points out that, although there are marked differences between the countries with the greatest vulnerabilities and the rest, a certain synchrony is observed in the evolution of the housing markets in Europe.

In principle, the regulation of real estate markets or the footprint left by the global financial crisis could hardly explain this common factor, given its heterogeneity between countries. On the other hand, there is greater synchrony in the cyclical position and, above all, in the "lax" financing conditions in an environment of low interest rates.

Housing financing

Specifically, the principal components analysis shows that the first common component explains between 50% and 60% of the variations in house prices. This first common factor is more important when it comes to explaining the developments in house prices in countries with alerts.

However, this first component also explains a very high percentage of the variability of house prices in Spain, around 60%, a higher proportion than that of the rest of the euro area countries with lower vulnerabilities. Therefore, the presence of a common cycle is more pronounced in the economies with the greatest imbalances, but it is also present in the rest and, in particular, in Spain.

Source: El Economista