Euribor for November 2007: 4.607%

Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – dropped last month to 4.607% (to be confirmed by the Bank of Spain), the second consecutive monthly fall, though Euribor is still 19% higher that it was a year ago.

Euribor may have stabilised after close to 2 years of increases but this is not going to open the flood gates to new borrowing. If anything borrowing is getting harder as banks impose stricter lending conditions in the aftermath of the US sub-prime mortgage crisis. A new survey from the Bank of Spain finds that Spanish mortgage lenders have substantially tightened up lending criteria since October.

Furthermore, since the beginning of this year mortgages have been more expensive in Spain than the rest of the Euro zone. According to the ECB the average Spanish mortgage rate in September was 5.49% compared to a Euro zone average of 5.36%. Back in January 2004 Spanish mortgages were almost 1% point cheaper than in the rest of the Euro zone (3.53% compared to 4.47%).

The result is that the Spanish Mortgage Association forecasts that the number of new mortgages taken out this  year could fall by as much as 30% compared to last year, and mortgage delinquency rates will rise to 0.6% – double the rate of 4  years ago.

The US sub-prime mortgage crisis and subsequent credit crunch mean that mortgage conditions will continue to tighten even if the ECB lowers the base rate, as risk premiums have gone up with the recent financial turbulence. As it happens the ECB left base rates unchanged at 4% in November, and will not rule out further increases if inflation rates require it. The Euro zone inflation rate is currently 3%, well above the bank’s 2% target, whilst the inflation rate in Spain is now 4.1%. The rise in Euro zone inflation from 2.6% in October to 3% in November suggests that the ECB might have to raise base rates again in the coming months.

© Mark Stucklin (Spanish Property Insight)