Bank of Spain governor says house prices overvalued, but hesees gradual and orderly cooling off in the Spanish property market.
Bank of Spain Governor Jaime Caruana Wednesday reiterated that the central bank believes house prices are overvalued as a result of an extended property boom, but ruled out the possibility of a "disorderly adjustment" in the market.
"It is evident that there is a significant degree of overvaluation in the property market, which has been growing progressively," Caruana told a seminar on the financial sector. "A gradual correction in the current imbalance is foreseeable and desirable," he added.
The Bank of Spain has previously estimated that house prices are overvalued by around 20 percent with respect to the long-term fundamentals of the market.
House prices in Spain have risen on average by 150 percent since 1997, and despite forecasts to the contrary, have so far shown no clear signs of slowing. According to figures from the Housing Ministry, property prices were 15.7 percent higher in the first quarter of this year from the same period a year earlier.
However, Caruana said the Spanish economy is better placed than others such as the United States, Britain or Holland to cope with a downturn in property prices. "The segment of the population that has assets which are clearly vulnerable is limited," Caruana said.
The Bank of Spain governor said the level of indebtedness of Spanish households is also lower than in the United States and Britain, while families have not followed the same trend as elsewhere in taking advantage of an appreciation in the price of their homes to finance consumption.
At the same time, the Spanish financial system is solid enough to withstand even the unlikely outcome of a brusque fall in property prices, he added.
However, despite the current low level of non-performing loans in the banking system, he warned credit institutions not to lower their guard in their lending policies, and factor in eventualities such as interest rate hikes, a fall in property prices and the subsequent slowdown in the mortgage business.
ECB monetary policy
Caruana described the European Central Bank's monetary policy as "appropriate" given the threat of inflationary pressures stemming from the sharp rise in oil prices. The ECB has left its intervention rate on hold since July 2003 at 2 percent. Caruana said that "while strong tensions in prices are not visible on the horizon, risks exist" of a pick-up in inflation in Europe.
source:
www.elpais.es
