The International Monetary Fund (IMF) forecasts that risks may emerge in the real estate sector between 2020 and 2023.

In the analytical chapter dedicated to house prices in its Global Financial Stability Report, the IMF draws attention to the risks associated with rising house prices, without, however, identifying which countries are most vulnerable.

A loss of momentum in the real estate sector, excessive credit growth and tighter monetary conditions appear to point to increased downside risks to house prices. Should this occur, global financial and macroeconomic stability could be affected over the medium term. Although the current risks are lower than those observed in 2007, they still exist.

The IMF´s concern stems from the fact that two-thirds of the nearly 50 banking crises of recent decades were preceded by increases in house prices. Recessions also tend to be deeper and longer-lasting when property prices fall more rapidly.

The real estate sector can destabilise the economy due to the importance of property in the financial position of individuals and companies, and particularly on banks´ balance sheets. The lower interest rates currently being recorded may lead to excessive indebtedness and an overvaluation of house prices, which in turn boosts GDP. Conversely, an adverse shock to the economy can cause interest rates to rise, debt-servicing costs to increase and the need to reduce indebtedness, encouraging property sales at lower prices and contributing to a fall in GDP.

These opposing effects contribute to greater imbalance.

The strategy for addressing this imbalance does not involve controlling prices, but rather reducing the risks associated with the sector by strengthening borrowers´ resilience. This strategy has been adopted by Banco de Portugal through restrictions on housing credit criteria, namely limits relating to the ratio between the loan amount and the value of the property provided as collateral, as well as the ratio between the monthly loan repayment and the borrower´s income (debt-service burden).

Source: Jornal de Negócios
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