Key facts
- Spain and Portugal are increasing scrutiny of their property markets due to early signs of overheating.
- Spanish house prices increased 12.9% year-on-year in the first quarter, and Portugal's grew 17.8%.
- Mortgage lending in Spain rose 3.8% year-on-year in the first quarter.
- Portugal's central bank has requested lenders reduce the maximum debt service-to-income ratio for new borrowers to 45% from 50%.
- Spain's central bank is considering limits on mortgage lending.
- Current market conditions are not comparable to the boom and bust cycles preceding the 2008-2009 financial crisis.
Spain and Portugal are intensifying their oversight of rapidly expanding property markets, driven by early indications of overheating. Despite strong demand and tight supply leading to significant price increases—12.9% year-on-year in Spain and 17.8% in Portugal in the first quarter—supervisors are unlikely to implement heavy interventions. This cautious approach stems from the current market conditions not yet mirroring the severity of past boom and bust cycles that led to economic downturns.
In Portugal, the central bank has requested lenders reduce the maximum debt service-to-income ratio for new borrowers from 50% to 45%. Meanwhile, Spanish supervisors are monitoring competition among banks, particularly concerning higher loan-to-value (LTV) borrowing, which has seen an increase in the share of new mortgages. The Bank of Spain is considering limits on mortgage lending, a recommendation previously made by the IMF.
Analysts suggest that interventions like capping mortgage rates might be ineffective without addressing the fundamental issue of limited housing supply. Furthermore, current lending and price growth metrics remain below the levels seen before the 2008-2009 global financial crisis. Data indicates that average LTV ratios and other key metrics are still below historical highs, and much of the new mortgage lending is at fixed rates, shifting rate risk to lenders.