Real estate financing
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Real Estate Watch
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at the same bank. Around half of the changes registered in these mortgages were in interest rates. The general trends in this type of change indicate that paradoxically and even despite greater monetary restriction, there are changes in mortgage indexing from a fixed rate to a variable rate. Equally, as is already observed in the new operations contracted, the Euribor is the benchmark most used in the changes in loans for housing.
The slowdown in lending, more obvious in 2007
The renewed dynamism of the Spanish economy and the real estate sector, together with the inertia characterizing mortgage performance, will mean that mortgages will maintain their expansive tone this year. However, the gradual adjustment the real estate market will undergo, in a less favourable context for interest rates, will lead demand for mortgages to slow and this will be more obvious in 2007.
The continuous expansion in lending of the last few years has produced an increase in the indebtedness of households which reduces their capacity to take on new debt in an environment where interest rates will continue to rise. However, as is described in the adjoining box, because of their progressiveness and the limited range in comparison with the interest rates prevalent in the Spanish economy before it entered the euro, the increases in interest rates will allow the tougher monetary policy to be absorbed without any major tensions for Spanish households.
However, it is important to remember in this type of analysis that the impact of higher interest rates may be felt to a greater extent in households whose financial situation is less comfortable. According to Bank of Spain estimates3, it is observed that in the case of the Spanish economy, the indebtedness ratio and the debt burden present a negative relation with the level of income, which makes the stratum of the population with the lowest income (households in the 0-20 percentile) particularly vulnerable to changes in financing conditions. Nonetheless, according to the central bank's own calculations, after deducting their debt burden these families would see their income fall by 2.5 p.p., 5.1 p.p. and 7.3 p.p. with respective increases of 100 bp, 200 bp and 300 bp in the cost of financing. Considering how moderate these effects are, it can be concluded that even this segment of households will be able to assume the change in financing conditions.
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Analysis by segments of the sensitivity of the household debt burden to increases in interest rates. Bank of Spain's Annual Report for 2005.
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