The recent dramatic fall in Euribor is unlikely to resuscitate the comatose Spanish property market because lenders have raised the risk premiums they charge in anticipation of higher default rates, according to a new report from the Fundación Cajamar, part of the Cajamar savings bank.
Euribor (12 month) is the interest rate most commonly used to calculate mortgage payments in Spain. It is the interest rate that banks in the Euro Zone use to lend to each other, and is derived from the base rate set by the European Central Bank (ECB).
“It is no longer a question of the cost of financing, but rather the greater credit risk attributed to anything related to the construction sector,” explains the report.
Compensating for rising default rates will be a primary objective for banks in 2009, argues the report. As a result, the report argues, it is quite possible that residential mortgage lending will continue to decline in the coming months.
The report underlines the fact that the collapse in residential construction has not been compensated by an increase in public works.
“The situation that the residential construction sector finds itself in is very worrying, and there are no signs that it will stabilise soon,” says the report, which calls for “urgent” intervention by the government.
Thoughts on “Falling Euribor mortgage rate unlikely to resuscitate Spanish housing market”
Interest rates have long been accepted as the primary factor behind stimulating the property market and prices. This is simply not true.
The real drivers are national GDP and average incomes; together with local factors such as supply and demand and desirability.
The only factor that will stabilise the property market is a reduction in prices that is commensurate with affordability. Therefore, in Madrid this is dependent on local earnings; in Marbella et al this is based on the earning of both national and international buyers.
Interest rates have very little effect on prices. Credit is (should be) issued based on credit ratings, not variability in interest rates.
The sooner prices fall the sooner the market will stabilise. Those areas with huge oversupply will take longer than others. Marbella has had more than two years of correction due to he planning scandal. Therefore, its supply overhang is smaller than other areas; prices have also been falling for longer for the same reason.