2022 is set to break records and become the best year for mortgages since 2010. This is despite the most rapid interest rate hikes in the history of the euro. The real estate market continues its upward trend, but with increased pressure
Author: Carlota G. Velloso

Source: El Economista

Despite the European Central Bank (ECB) raising interest rates at an unprecedented pace in the euro’s history, it has failed to cool the real estate market in Spain. Even with a 250 basis point adjustment in financing costs over recent months, the interest in buying property remains at peak demand levels, according to an analysis by Fotocasa.

The cycle of monetary tightening has indeed led to changes in housing loan market trends. However, it has not altered the appetite for real estate. This year, 2022 is expected to surpass the previous record figures and close as the best year for mortgages since 2010. “Citizens are in full contact with financial institutions to seek financing that allows them to purchase a home,” explains the study on the impact of monetary adjustments on housing. “Despite the interest rate hikes that marked the second half of the year, the end of 2022 will be a major milestone for the mortgage market,” they add.

Moreover, the ECB’s tough stance has not deterred banks, which continue to grant mortgages at a steady pace, according to Idealista. Financial institutions have not wavered, even with the increased risk of default due to the surge in the Euribor. Although credit is still being granted, the manner in which it is offered has changed. Some lenders have fully passed on the interest rate hikes to prices, while others prefer to make offers below expected levels, explains the real estate portal. “Now more than ever, obtaining personalized offers from different banks and comparing conditions is more valuable than ever,” highlights the portal.

The buyer’s zeal has led to the largest increase in the price of second-hand housing in three years. In November, prices rose by 7.1% year-on-year. In some areas of Spain, such as Badajoz or Alicante, this increase has exceeded 16%. “A significant portion of buyers have rushed to finalize deals with financial institutions to purchase property before further price increases,” explains Fotocasa.

However, despite buyers’ urgency, mortgage rates have already risen, and the rates offered now, both variable and fixed, are significantly higher compared to a few months ago. It is worth noting that the Euribor for 12 months was negative in March, just seven and a half months ago, while it closed in November at 2.829%, the highest since December 2009. The benchmark is now expected to approach 3% by the end of the year.

Banks Stop Offering Fixed Rates
This has led banks to capitalize on the current situation and stop offering fixed-rate mortgages, explains the same source. Financial institutions have either withdrawn such offers or proposed discouraging contracts with a fixed interest rate around 4%. This is contrary to what families currently seek. In April, there was one of the highest figures historically, with 75% of loans granted with fixed rates. However, the withdrawal of these contracts has caused that percentage to drop to 66% in September. Not due to a lack of demand, but due to a reduced offering of fixed-rate loans.

In fact, this shift towards ‘safety’ is also seen in mortgage renegotiations. Requests to change mortgages have multiplied by five, according to Idealista, a trend they believe will continue during the first half of the coming year. Fotocasa agrees with this forecast and highlights that the shift from variable to fixed loans reflects “citizens’ concerns about the accelerated rise of the Euribor.”

The surge in this indicator weighs heavily on families’ finances. If a Euribor of 12 months at 3% is confirmed this month, for a mortgage of €150,000 with an interest rate of Euribor plus 1%, the monthly payment would increase by €267 compared to the last month of 2021, and the annual cost would rise by an additional €3,204, according to the cited analysis. If the loan is €350,000, that household will pay €624 more each month compared to December 2021 and nearly €7,500 more annually. The exact impact will depend on each case’s conditions, but monthly payment increases for variable-rate mortgages are estimated to reach 41% in December.

Greater Risk and Increased Pressure on Families
However, some might suffer even more, with increases of up to 59%. These are families that took out variable-rate mortgages in the last six years in a context of monetary expansion and negative interest rates. These families represent 16% of market loans. “They are the ones who would truly face risk as the increase in their payments could exceed 59%,” notes Fotocasa. They are the ones who have amortized the least principal, as the initial years, especially, involve paying more interest due to the French amortization system.

Although the change in the mortgage financing cycle has not yet reduced housing demand, this could change in the coming months. On Thursday, the ECB announced it would raise interest rates “further” than previously forecasted. This is because inflation is expected to be higher than initially predicted by Christine Lagarde’s institution. Furthermore, the ECB assumes that the Eurozone economy is already contracting and that a technical recession will be confirmed in the first quarter of 2023.

In fact, there are already signs of this pressure, with 24% of buyers having had to halt their home buying process, according to the same data. Mortgage conditions are less attractive. The current level of interest rates will weigh on family savings and reduce household consumption. As more of their salary or savings will be directed towards paying mortgage installments, less will be available for other purchases.

Although the ECB has restricted monetary supply until the recession, the margin for further rate hikes is limited. If rates rise above 4.5% (from the current 2-2.5%), payment capacity would be significantly compromised, as at that level, the risk of family defaults would increase considerably.