If the Euribor rose from the current 3.20% to 4%, a million and a half families would not be able to buy a home of more than 170,000 euros
The payment of a mortgage must not represent more than 35% of the household income for the bank to grant a mortgage
The rise in interest rates and its correlation with the euryborthe reference index of the variable mortgages, makes it difficult, obviously, to access housing, especially for those with a lower income. With the ‘free money’ stage over, at least for the next few years, Spaniards must face the purchase of a house in a more unfavorable situation than just a year ago.
This unequally affects people based on their household income criteria. Because? In the first place, because, on many occasions, the purchase of a new home supposes a replacement of the previous one. This means that the old one is sold to pay for the new one, with or without a separate mortgage. However, those who do not own a property have to achieve a minimum saving of 25% or 30% of the acquisition cost to satisfy bank and tax requirements. Similarly, those with higher wages can bear a larger mortgage, while lower incomes cannot.
With the Euribor at levels above 3%, from which it has not fallen since December last year, reaching around 3.7%, 38% of Spanish families, more than seven million, cannot buy a second-hand home with a price higher than 170,000 euros because the bank is not going to lend them the money. The financial institution will not grant the mortgage if the family has to invest more than 35% of their monthly income in paying the debt; according to data collected by Enrique Martín Barragán, IEB professor and former director of JLL and Sareb, which have been compiled by Javier Sánchez, CTO of the Spanish developer Aedas Homes, in the newsletter ‘Unreal Estate’.
What will happen if the Euribor rises?
According to data from the National Institute of Statistics (INE), updated in 2020, the number of households in Spain exceeds 18.75 million. In the worst case scenario, in which the Euribor reaches 6%, levels not reached throughout the 21st century, although previously, 61% of households could not acquire a typical second-hand apartment for 170,000 euros because the Annual income necessary for this is 35,000 euros. This worsens with a floor of 250,000 euros, where 85% are excluded from the market because an income of more than 51,300 euros is needed year.
In more reasonable scenarios, in which the Euribor goes from 3% to 4%, at least 1.5 million households would no longer be able to acquire a second-hand home of 170,000 euros, like the one mentioned above. In the case of new construction, based on the average income of the INE, 6.75 million households could access 3%, which would only be 5.25 million at 4%. This implies that Spanish families without access to a house of 250,000 euros would go from 64% to 72%.
The forecasts of financial institutions such as ING already point to what to see the interbank loan rate above 4% may be a reality before the end of the year, as long as the European Central Bank does not stop interest rate rises. During the last weeks it has been around 3.7%, although it has corrected close to half a percentage point after the rescue of Silicon Valley Bank in the United States and the purchase of UBS to save Credit Suisse.
What home can be bought by paying a mortgage of 1,000 euros per month?
The rise in the cost of loans directly influences the purchasing power that families have. This can be clearly seen with a graph that exemplifies how much a person could pay for a home, taking into account that the monthly mortgage payment is 1,000 euros, the duration of the loan is 30 years and the variable Euribor +0.5% rate. . With these characteristics, the bank obliges you to receive a net monthly income of more than 2,850 euros so that the part of salary that is destined to satisfy the debt does not exceed 35%.
In 2020 and 2021, with that mortgage payment of 1,000 euros per month, a family could acquire a property above 425,000 euros or even close to 450,000. Now, in 2022, with the Euribor above 3%, this purchasing power has been drastically reduced. With a monthly payment of 1,000 euros, an individual who requests a loan could only do so for a house of around 267,000 euros. As can be seen in the graph, the drop in purchasing power is greater than that registered during the last throes of the real estate bubble.
These data are taking into account that the buyer only contributes 20% down payment to purchase the home. If it is a replacement, in which an individual sells his property to buy a larger one, the requested leverage may be lower and, with this, he will have more buying power.
Maximum Effort Ratio
This situation, not at all positive for the access to the purchase of a house by the less wealthy classes, joins another problem, the effort rate of households is at its highest in the last decade. According to one of the latest reports prepared by CaixaBank, families already allocate 38% of their income to pay their mortgages. This is mainly due to the increase in the cost of installments due to the rise in interest rates and the Euribor, affecting only variable rate loans.
The Bank of Spain recommends that the effort ratio not exceed 35%, avoiding situations such as those of the real estate bubble, where levels of 50% were exceeded. After the puncture, families and companies gradually deleveraged until they reached more reasonable levels. CaixaBank estimates that this indicator could fall slightly at the end of the year, as long as house prices are contained or register slight falls.