MORTGAGES: Inflation ends with 'megabarata' mortgages: the complicated picture drawn by experts

DOMUS DP Real Estate

SOURCE: IDEALISTA           Author: @Ana P. Alarcos            16 March 2022, 6:04

We are in a time of maximum uncertainty. Runaway inflation, a war in Europe, weaker than expected growth, bills that do not stop rising ... and without the economy having fully recovered from the blow of the pandemic that broke out two years ago.

The current scenario fills citizens with doubts and concerns, especially those who have contracted a mortgage or are looking for financing to buy a house. And it is not for less: little by little the chances of the increases in interest rates are increasing and, with them, an increase in the price of loan installments. An extra outlay to the current extra cost of the shopping basket, basic household services or transportation.

But are there reasons for concern? Will we see rate hikes this year? What measures could be taken to contain inflation? What can families do to protect themselves from widespread price rises? Economists and mortgage market experts explain what we can expect in the coming months and why it is so difficult to find an immediate solution.

Will interest rates rise in 2022?

It is not yet clear, although the market assumes that there will at least be a rise in interest rates after the summer.  The price of money has been at an all-time low of 0.0% since spring 2016, although the escalation of inflation, which in the euro area has broken records in January and February and in countries such as Spain has been at its highest for more than three decades, it could lead to the first rate hike since 2011.

Santiago Carbó, director of Financial Studies at the Foundation of Savings Banks (Funcas), says that the rise in the price of money "is one of the great unknowns of the year." "In a central scenario, the ECB would wait until next year because its assumptions to do so (inflation driven by more or less temporarily limited shocks and recovery not yet sufficiently robust) are still there. The problem is that, if inflation is prolonged, the scenario is going to get quite complicated. And the reality is that it is already very likely to last beyond spring, which breaks with inflation forecasts for 2022 and changes the scenario for the ECB. Since his mandate is to control inflation – and being close to 6% in the eurozone – the decision is complicated and the pressures will increase."

Miguel Córdoba, professor of Financial Economics at the CEU-San Pablo University, also believes that "the pressure on the ECB to raise rates will be irrepressible, as well as to stop buying sovereign public debt or to stop giving the banks all the money they want." And he explains that the three figures (rates, debt and liquidity) "are facilitators of inflation and if money flows uncontrollably, prices can continue to rise. But if it is restricted, because there is not enough money or being very expensive, the demand decreases and the supply has to adapt to the new scenario. So I think interest rates will go up this year, even though they will be small, spaced hikes."

For his part, Gonzalo Bernardos, professor of Economics at the University of Barcelona (UB), affirms that "the current rates at 0.0% are over". In his opinion, "we are practically guaranteed that in the second half of the year there will be a rise in interest rates, although the doubt is whether the ECB will raise them by 0.25% or up to 0.75%". But, before making the price of money more expensive, Bernardos recalls that the monetary and financial authority must withdraw another extraordinary measure, the purchase of debt, which he expects it to do in June at the latest.

For Manuel Romera, director of the Financial Sector at IE Business School, everything will depend on the level at which inflation reaches. "If the war between Russia and Ukraine lasts too long and is not resolved in days, there will be enough inflation so that the ECB has no choice but to raise interest rates this year. or," he says.

Has the conflict between Russia and Ukraine been the trigger for the situation?

Economists recall that there was already high inflation before the outbreak of war in Eastern Europe. In this sense, Cordoba recalls that "the increases in raw materials, maritime transport, energy, semiconductors, etc., have been occurring for many months. The Ukrainian conflict simply worsens what was already quite bad".

Bernardos adds that the war has turned inflation from a one-off problem to a lasting one-off problem, which will force central banks to act: specifically, to raise interest rates and regulate economic activity to control the escalation of prices.

Romera recalls that inflation was already close to 6% in the eurozone before the invasion of Ukraine by Russian troops, but the conflict and the current energy crisis could bring the figure to double digits. Funcas, for the moment, anticipates a CPI in Spain of 8.6% in March, which would be the highest since the summer of 1986, according to the historical series of the INE. 

Has the era of the cheapest mortgages in history come to an end?

The minimum mortgage rate hit record lows in 2021, but experts assume that interest rates are bound to rise from now on. 

Gonzalo Bernardos insists that "what has happened in recent years is not normal, but something completely unusual. Therefore, now we have to raise rates, an increase in the Euribor and probably within 5-10 years we will see the Euribor above the historical average (which currently stands above 1.8%), because economic conditions have changed. "

Juan Villén, director of idealista/hipotecas, also believes that rates could have hit the bottom. "The Euribor has already risen and does not look like it will return to lows", while "the rates of new operations are rising, above all the fixed ones that are the ones that have been most affected by the rise in the long-term interest rate curve. In fact, some banks, discounting a future rise in the Euribor, have slightly lowered the spread of their new variable mortgages."

In the same vein, Miguel Córdoba believes that the interest rate on mortgages cannot fall further and insists that the moment the ECB begins to raise rates, the Euribor will do so and mortgage rates will rise. "We will start to see this in the coming months, although the cycle of increases will take 12 months to complete, since mortgages are usually renewed annually."

Will short-term mortgages become very expensive?

Experts agree that there will not be a very aggressive increase, but that the increases will be small and staggered over time.

Leyre López, an analyst at the Spanish Mortgage Association (AHE), believes that "regardless of the decisions taken by the ECB, we will continue to witness a very favorable interest rate environment. The fact that mortgages can become more expensive to some extent does not mean that interest rates will be at comparatively high levels, since they start from minimum records."

For his part, Gonzalo Bernardos is betting that mortgages will remain cheap in 2022 and 2023, although less than they have been so far.

Should families be worried?

Although in the short term a strong increase in mortgage prices is not expected, the possible rise in interest rates will mean an increase in monthly installments, which will become an extra disbursement for households and that will be added to that of the shopping basket, Domestic bills or transportation. Overall, this is a worrying scenario for households, according to the economists consulted.

Miguel Córdoba, for example, recalls that "wages in Spain are not like Europeans" and that "many citizens and families arrive with difficulty at the end of the month".  According to a UGT report, based on OECD data, the average real wage of workers in Spain has fallen so far this century. Specifically, it has fallen by 1.1% in two decades, while in the area of the common currency it has increased by more than 12%.

Therefore, "the energy increases and the foreseeable food will necessarily affect the cost of the shopping basket, and it is not the same that a European who charges 3,000 euros a month has to restrict his leisure expenses a little or go less to restaurants, than a Spanish mileurista who if he has to pay 50 euros a month has to turn off the heating or stop eating meat or fish weekly because it does not reach him. The problem catches us in a situation of weakness that leaves few degrees of freedom to the Government, regardless of its political orientation, "insists Córdoba.

How to protect yourself from the current situation?

Experts recommend that mortgage holders consider moving to a fixed mortgage to eliminate interest rate risk, and that, if they are determined to make the change, they do so immediately.

"Mortgage holders who have a loan referenced to the Euribor are already late.  They had to have been savvy earlier and opted for the fixed rate. Many consumers have noticed that they paid less for a variable rate than for a fixed one and have not taken into account that the mortgage is sometimes signed up to 25 or 30 years. Despite this, my recommendation is that you hurry up and take advantage of the offers that are still on the market. A fixed rate of 1.5% is to take it without thinking, and although it is more expensive than they could have had three months ago, it is much cheaper than what those who borrow in the coming years will pay, "explains Gonzalo Bernardos.

The head of idealista/mortgages agrees with the economist and states that "those who have fixed mortgages can sleep peacefully.  On the other hand, those who have variable mortgages should think about whether to change to fixed, even if in the short term it means paying a higher fee, especially if they are not very comfortable in income, since they would be in difficulties if the Euribor rebounds a lot. "

Villén recalls that, with current conditions, if the Euribor is above 1%, a fixed mortgage today will be cheaper than a variable one. And although we probably do not see the Euribor at those levels in 2022, it should be remembered that the mortgage is a long-term loan.

"Those who are in that situation must change to a fixed rate as soon as possible, because surely fixed mortgages will become more expensive as we see interest rate increases, and then the window of opportunity will have been lost. Therefore, if you want security, better today than tomorrow, "emphasizes Villén.

Banking, for its part, reaches out to customers in the face of a new situation of uncertainty. José Luis Martínez Campuzano, spokesman for the Spanish Banking Association (AEB), insists that the sector "fully trusts that the European Central Bank will take the appropriate measures to keep inflation under control, also limiting the risk of rising inflation expectations." In turn, he adds, "banks are going to do everything possible to continue protecting and helping consumers in a scenario as difficult as the current one, as they did during the pandemic. It is important that customers talk to their entity in case of any doubt or concern they have, "they say from the financial employers. 

What measures can be taken to curb inflation beyond raising rates?

Experts believe the solutions are in the hands of the body led by Christine Lagarde. According to funcas' Financial Studies report, "at the moment, energy has a fundamental weight in inflation in the euro area and the ECB can do little about it. What is possible is that, to avoid worrying situations in debt and risk premiums, the monetary authority has to design some liquidity and asset purchase program to replace those that are now running out. Especially if it is forced to raise rates finally and, therefore, to stress the cost of debt."

Miguel Córdoba also focuses on the monetary authority and emphasizes that only it can decide on rates, so "we depend completely on the actions of the ECB." However, the professor of Financial Economics at the CEU-San Pablo University does see room for action in the energy market.

"Only the EU can decide to change the 'marginalist' market that makes international MWH prices trade at the maximum price of all energy sources. The only thing the Spanish Government can do is to reach an agreement with the Spanish energy companies, which produce 95% of the electricity and gas needs, so that they do not charge energy at international prices, since they have cheaper long-term contracts, in addition to the fact that nuclear energy and renewables are not affected by the rise in gas." Another possible alternative is to reach agreements with Sonatrach, the Algerian gas company, "so that it permanently provides us with gas at a reasonable average price for the coming years." In addition, he sees it necessary to reach an agreement on prices worldwide to avoid ending up in a scenario of "stagflation, from which it is very difficult to get out", since it would mean the coexistence of variables such as high inflation, lower economic growth and a high unemployment rate.

There is also an open debate about the appropriateness of lowering taxes to try to compensate for the energy overrun. For the director of the Financial Sector at IE Business School, "fiscal policy measures could be taken by governments. That is, lower taxes to compensate for inflation, generate economic confidence and allow the private sector to breathe." These measures are already being considered by the Executive and also by Brussels. 

However, Gonzalo Bernardos warns that a tax cut could also lead to an increase in economic activity and an increase in the demand for goods, which could be a revulsive for inflation. In addition, he believes that the public deficit would increase, which would boost the risk premium and could "lead to more undesirable consequences than the current ones." "We have no choice but to suffer economically," concludes the professor of Economics at the University of Barcelona.

SOURCE: IDEALISTA           Author: @Ana P. Alarcos            16 March 2022, 6:04