Since 2015, real estate prices in Portugal have doubled.

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According to the IMF, Portugal is one of the five European nations where there are more indications of an overvalued real estate market.

According to a report released on Friday, the IMF warns that house prices in Portugal have doubled since 2015, while the gap between these prices and rents has widened since the pandemic.

In a regional report on Europe, the International Monetary Fund (IMF) notes that real estate markets throughout the region are increasingly displaying signs of overvaluation, citing five countries as examples.

The report states, “Real estate prices in the Czech Republic, Hungary, Iceland, Luxembourg, the Netherlands, and Portugal have doubled since 2015.”

The IMF staff emphasizes that “since the pandemic, the disparity between house prices and incomes, as well as between house prices and rents, has widened.”

According to the accounts of the Bretton Woods Institution, house price-to-income ratios are more than 30 percent above long-term trends, and house price-to-income ratios “also far exceed historical norms, including in Northern European or emerging European economies.

In this regard, the IMF indicates that empirical models point to an overvaluation of 15 to 20% in the majority of European countries, but “house prices have recently fallen in many markets” as a result of rising bank rents and inflationary pressures on real incomes.

In the same analysis, it is also noted that the rising cost of living and mortgage payments are “stretching” the family budget, which could deteriorate further if additional negative shocks occur.

In adverse scenarios with higher living costs and higher benefits, approximately 45% of households — and more than 80% of low-income households — could experience increased economic hardship.

Nonetheless, the IMF is of the opinion that “impacts on bank balance sheets should generally be contained,” but that this “picture gets murkier under a combination of shocks, including a large correction in house prices.”

“Under the benchmark (Common Equity Tier 1), the capital decline from rising household debt defaults would not exceed 100 basis points in the majority of countries, but a 20% slowdown in the housing market would increase losses to a range between 100 and 300 basis points, with Southern and Eastern European countries being the most severely affected,” he adds.

In this scenario, such losses may result in tighter credit standards, thereby increasing the likelihood of adverse cycles involving bank balance sheets, real estate (and other asset) prices, and the real economy.

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