But the IMF’s warning was not limited to Portugal. In its annual assessment of the euro- zone (Article IV), the IMF notes that “there are financial vulnerabilities that may be emerging on certain exchanges” in certain regions within the EU.
These, the Fund said, are, “for example, Luxembourg, some German cities, some areas in Portugal and the Netherlands - where imbalances between demand and supply are leading to a strong appreciation of residential [housing] or commercial real estate”.
Without further elaboration on the subject, the IMF, led by Christine Lagarde, drew attention to the fact that this latent problem is all the more threatening the greater the private indebtedness.
Diário de Notícias (DN) reports the Fund’s main concern is that, in a context of rising interest rates like those already on the horizon and which may even be experienced by the end of the year, these imbalances can lead to breakdowns. The value of real estate may fall and interest rates rise, leaving borrowers in trouble, it explains.
An IMF mission that visited Portugal in the latter half of May left very concrete messages on the problem.
The country needs to grow and reduce “the vulnerabilities arising from high public and private indebtedness” and “house price increases should continue to be monitored, given the importance of mortgages on banks’ balance sheets”, it advised.
In December, the Bank of Portugal said that it did not see any worrying signs that this was happening, but with new data, it apparently changed its mind and in early June warned that “in the second half of 2017 there were signs of some overvaluation of residential real estate prices in Portugal”. This overvaluation was still “slight” in aggregate terms, the Bank noted.
“Although indications of price overruns in the residential real estate market in aggregate terms are very limited, the duration and pace of price growth in this market (increases of 32 percent and 27 percent in nominal and real terms, respectively, from second quarter of 2013) may entail risks to financial stability, should these dynamics persist”, it said.
The BdP also said that the pressure-cooker phenomenon in some segments of the housing market will reflect “the strong increase in tourism and demand from non-residents” looking for these higher-yielding assets as alternatives to deposits or other less interesting applications in terms of remuneration.
However, all this is happening at a time when the eurozone is reportedly about to inflate the direction of its interest rates, now set at zero, DN recalls.
In recent days the IMF has also expressed concern about this near future and recommended the European Central Bank (ECB) not to rush.
The chairman of the monetary authority Mario Draghi has already said that the ECB wants to end the debt and other asset purchase programme later this year and would like to start raising interest rates after the summer of 2019.
According to DN, the ECB may be forced to postpone the momentum of this rise as the eurozone economy is losing strength and overall inflation remains too low, observers stress.
It could “take a few years” until inflation reaches the ECB’s target (close to but below 2 percent): that is, Frankfurt may have to wait longer than it thinks to raise rates in a certain way.
If this scenario, defended by the IMF, comes to be, the most indebted investors, such as those who invest in housing in Portugal, will be protected for a little more time.