The Bank of Spain is working to impose limits on the granting of mortgages, with the aim of avoiding the formation of a possible new real estate bubble resulting from the increase in house prices. The regulator is currently focused on determining the macroeconomic conditions that could justify the activation of these limits, as well as how to avoid them imposing too high a restriction on the flow of credit reaching the economy, especially at a time of crisis in access to housing, according to informed sources. Once the preliminary study currently underway is completed, the regulator’s leadership will be able to activate these limits if they deem it necessary.
After the Great Recession, major institutions at the national, European and global levels conspired to ensure that disaster would not happen again. Among other issues, they have provided supervisors with the firepower needed to identify and resolve possible problems, such as the large speculative bubble that destroyed half of Spain’s financial sector about 15 years ago. Among these measures there is, for example, the activation of the countercyclical cushion that the Bank of Spain decided last year for 0.5% of the assets of Spanish institutions and which represents a capital supplement in times of economic prosperity so that they can absorb macroeconomic fluctuations in the most unfortunate seasons.
Another of the tools available to regulators are the so-called borrower-based measures (borrower-based measures). These are limitations that national banks in the Eurozone can impose to prohibit financial institutions from granting mortgages that involve excessive risks. These limitations concern four elements: the link between the value of the property and the amount lent, the size of the loan and the income of the person taking out it, the interest that must be paid and the duration of the debt.
Although the Bank of Spain already had the legal framework to apply these limits since 2018, it was only in recent months that it took the first steps in this regard. This coincides with a particularly critical moment for the real estate market, with purchase and sale prices at the highest levels in the last 17 years. At the same time, in recent months several banks have complained about fierce competition in the mortgage market, which pushes the prices of these loans below both the Euribor and Spanish bonds, compromising the profitability of these loans for institutions.
The first mention of these limits on mortgage underwriting appeared in the financial stability report for the first half of the year drawn up by the Bank of Spain itself. In this document, the regulator admitted that it had established a work plan to follow the mortgage granting criteria and evaluate whether to activate limits in granting, after the European Systemic Risk Board had recommended to this institution at the beginning of the year the activation of such measures, while believing that the policies introduced so far by the Spanish supervisory authority were sufficient to neutralize the risks detected in the real estate sector.
Since then, the Bank of Spain has been working to “establish a theoretical framework” that assesses the appropriateness of activating these limits, according to informed sources. Specifically, the work was based on the collection of historical data on mortgage granting, including on works already published previously on the topic, focused on the experience of introducing such limits in other countries. And, fundamentally, in the development of theoretical models on the benefits and costs of introducing this type of measure. That is, evaluate the conditions that would justify the activation of these limits and analyze to what extent they can limit access to credit. “It is also a political discussion on how to introduce these issues without restricting access to credit at a time like this,” explains a source within the supervisory authority. The Bank of Spain is expected to provide more details on the progress of this work in the second half of its financial stability report, which will be published next week.
Once this theoretical work is completed, the General Directorate of Financial Stability will make its analysis available to the leaders of the national regulator, led by governor José Luis Escrivá. The highest authorities will ultimately decide whether the conditions exist to activate these limits on mortgage loans.
The introduction of these limits on mortgages is a measure that the European Central Bank (ECB) views favorably. So much so that only three countries (Spain, Germany and Italy) have not yet activated them. So far, European supervision has chosen to encourage banks not to grant too risky mortgages, instead of imposing bans. For example, in the calculation of the minimum regulatory capital required of institutions, the granting of mortgages that exceeded 80% of the value of the property was penalized. Now they are thinking of going further.
Financial sources indicate that banks hope to receive news on the matter soon. They also believe that the impact will not be very large, given that unlike during the bubble times, banks are already more rigorous in granting mortgages, although for months they have been skeptical of any measure that would impose a greater regulatory burden on the sector. They believe that it is already high enough and that it needs to be reduced and simplified.
The strong demand for mortgage loans, together with high property prices and the difficulties of sectors of the population such as young people in accessing housing, are leading banks to start taking a more flexible view of being more flexible. Some institutions already offer mortgages exceeding 80% of the value of the property, linked in many cases to the granting of public guarantees for the remaining 20% which have been opened both by various autonomous communities and by the Official Credit Institute (ICO). After the decrease in interest rates at the beginning of the year, banks chose to compensate for the decrease in revenues this entailed with an increase in the volume of loans.
Despite the vertical increase in house prices, the Bank of Spain still does not consider it worrying. In the latest report on financial stability it considered the risks associated with it to be moderate, driven by the strength of demand compared to supply. It also considers the criteria for granting mortgages stable, as well as some ratios that it keeps carefully monitored at low levels compared to historical series, such as the relationship between the mortgage and the borrower’s income or with the interest to be paid.
