SPAIN: Mortgage lending rise could lift house prices in 2015

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An increase in mortgage lending in Spain (Baa2, positive) over the last year could help the housing market to recover in 2015, Moody's Investors Service said in a sector comment.


Rising mortgage origination will likely improve the demand for housing, which in turn could help lift house prices, the rating agency added.
"Historically, there has been a high positive correlation between mortgage origination and changes in house prices. In our opinion, the increase in lending is therefore likely to translate into higher property prices this year," noted Rodrigo Conde Puentes, author of the report.
The Moody's report says lenders have actively competed to offer mortgage interest rates closer to pre-crisis levels in Q1 2015. Spanish residential mortgage-backed securities (RMBS) have traded at relatively low spreads, fuelling the battle to offer mortgages. The increase in mortgage origination will help to alleviate the house price decline if it is accompanied by good economic conditions, low interest rates and lower repossessions, which would stem the rising stock of unsold houses.
In Moody's view, the potential house price recovery will be uneven, as the costal areas have a higher stock of unsold houses than the central and northern regions. The stock of unsold new houses will prevent a sharper, more rapid recovery in prices. There are about 563,000 unsold properties, which represents 2.2% of the total properties in Spain.
Smaller loan amounts and low interest rates have improved the debt-to-income ratio for potential borrowers, increasing the pool of eligible borrowers for lenders.
For borrowers, a slowdown or reversal in price decline will create equity (the difference between the property's market value and the mortgage's outstanding amount). This would reduce the probability of default and the amount of losses upon default. Increasing recoveries and a faster time-to-sale would have a positive effect on outstanding RMBS transactions, as it would result in lower losses for tranches and a potential improvement in their credit enhancement.
The increase in demand and origination will also depend on interest rates remaining low. An ongoing decrease in the interest rate for mortgage origination will compensate for falling wages. Improved borrower affordability will have a knock-on effect on origination and demand, helping to stabilize Spain's housing market.