The coronavirus pandemic will push residential mortgage default rates up and home prices down in Spain and Portugal, Fitch Ratings says in a new report. Payment holidays have cushioned mortgage performance from the pandemic’s impact, but job losses mean some borrowers will face payment shocks as their payment holidays come to an end.
“We have updated our key analytical assumptions for Iberian mortgage portfolios to reflect the continuing credit effects of the pandemic. Under our ‘Bsf’ rating scenario reflecting our base-case expectation plus a small cushion, the lifetime default rate of a representative mortgage pool has increased to 9.7% in Portugal and 7.8% in Spain, from 9% and 7% respectively”, says the agency in a note.
Banking system non-performing loan (NPL) ratios have not yet risen from pre-pandemic levels, as payment holidays suppress and delay mortgage defaults. But while payment holidays will have helped some borrowers avoid default, the roll-rate to default for payment holiday loans will be mostly influenced by underlying employment dynamics. Historical data from legacy Spanish portfolios indicates that default rates on payment holiday loans could be about 20% higher than on standard loans.
Borrower support measures may have also delayed evidence of house price drops, amid very low interest rates and expansionary ECB monetary policy. Nevertheless, Fitch Ratings forecasts Spanish nominal house prices to decline approximately by 10% in 2020-2021, and had increased its “Bsf’ rating scenario current-to-trough house price decline (HPD) assumption to 24% from 17%, “mainly because of weakening affordability and fragile consumer confidence due to the pandemic’s impact on GDP and employment.
Unlike Spain, Portugal saw mortgage lending volumes grow in the first half of 2020, supporting nominal price growth in the high single digits. However, Fitch analysts believe lower domestic demand, and a more cautious approach by lenders and also by cash and foreign buyers (who together have accounted for more than half of housing market activity in recent years), will see prices fall by around 2% over the next one-two years. Our current-to-trough HPD assumption for Portugal is unchanged at 26%.