Fixed and variable rates and now mixed mortgages. The real estate sector seeks solutions to the abrupt rise in rates of the European Central Bank (ECB) and the increase in mortgage interest, especially those linked to the Euribor, the most used indicator for calculating monthly installments. In addition, the residential market expects its adjustment in 2023, although it will be “moderate”, as José Manuel Fernández, deputy general director of the Union of Real Estate Credits (UCI), has pointed out in an interview for Merca2.
The drop in the real estate supply has forced banks and credit institutions to rescue mixed mortgages. They are a product that serve as a shield in the medium term, by maintaining fixed mortgage rates for the first five, ten or 15 years maximum, to later modify the interest to variable interest.
«Today fixed rates are more expensive than variable rates», Fernández pointed out. Although he has highlighted mixed mortgages would be a “good product” in the current environment. And it is that, the ECB will continue to increase the official rates of the euro up to 4%, as estimated by the market, until the end of 2023. “It is returning to balance a bit in mortgages,” he maintained.
Transactions will definitely go down
In his opinion, the interest on mortgages should be between 5% and 5.5%, which is exactly where fixed rates should be in the current market situation. However, these levels would put even more pressure on mortgage productions. And it is that, the number of transactions mortgages is collapsing strongly, according to the latest data from the National Institute of Statistics.
BANKING AND COSTS TO AVOID EXPELLING DEMAND
In this situation, credit institutions are assuming the costs by not raising rates to the levels that would correspond. «Not an attractive level», considered the UCI manager. With the mixed mortgage, greater certainty is given to the client in the first years of the credit, especially when it comes to signing affordable installments and peace of mind in equal parts. Once this time has passed, the client has been able to lower principal and interest, thus paving the way towards the final payments of the credit.
However, to protect against increases in the Euribor, the deputy director of the Union of Real Estate Credits has considered it more feasible to reference mortgages to variable interest as long as the expected increases do not have a strong impact on expenses. “If there are clients who take financing without needing it and without involving an excessive cost in relation to income, I would recommend a variable interest rate,” he explained. For this situation, the cost of the mortgage could not exceed 30% of the income. The reason is that the yield curve in the Eurozone is inverted, although in Spain it begins to relax in relation to longer-term rates.
This indicator -the inverted interest rate curve- usually anticipates a recession within less than a year. Its reliability, as this medium has explained on several occasions, is 100%. And even with a 70% inverted yield curve, the probability also reaches the maximum possible. For this reason, it is estimated that the US would enter a recession at the end of this summer, as well as Germany.
THE EURIBOR REACHES THE PEAK AT 3.5%
However, Fernández expects the Euribor to reach its peak, in the 3.5%, this index will begin to recoil due to the retreat of the central banks, which would have to lower interest rates to encourage growth in the economy. In this sense, he recalls that GDP growth in the Eurozone is in full throttle, but has not yet reached the so-called technical recession -falls or zero growth for two consecutive quarters-.
The problem for central banks, such as the ECB, is that this movement cannot be done at the moment due to the high levels of inflation. In this sense, he has explained that lowering rates will tend to raise prices a little more. The ECB’s objective is to reduce inflation to levels close to 2%, although prices stood at 8.5% in January, four times more than what was stipulated. In this price containment, in addition, core inflation plays a key role -that counts inflation without energy prices and fresh products-. This index stands at all-time highs, at 5.2% without falling a single tenth compared to December 2022.
Unlike the US, where the economy adjusts almost immediately to inflation due to its energy independence, the Eurozone depends on gas, both from the Middle East, North Africa and the US. Despite this situation, Fernández sees the scenario of the coming months with “optimism” considering that there are “enough elements» to make the Spanish and European economy start up again.
REAL ESTATE TRANSACTIONS AND PRICES WILL FALL
On the other hand, Fernández expects the moderation in the prices of residential homes after the record years of 2021 and 2022 due to these increases in interest rates. In this sense, that new housing has reduced its weight in the real estate market below 10%, a level that is too low, while the second-hand market has registered more than 90% of transactions. «The second-hand market is conditioned by the cost of financing, both for investment and for living», he pointed out. In this regard, he has pointed out that the cost of financing has increased for this type of mortgage and therefore there is “very strong pressure on real estate prices.”
“Transactions are going to go down without a doubt,” without anticipating a percentage drop, although prices will be contained. Yes ok, “logic suggests that prices should go down, they don’t due to strong demand and very little supply», he pointed out. In this sense, he points out that the areas of the big cities will continue to have a great demand, while others, more depressed and even forgotten, will lower their prices more. In this way, those interested in mortgaging a flat are attentive to prices to avoid borrowing more than the value of the property.
