Rise In Rates Raises The Census Of Vulnerable Families To The Peaks

The deterioration of the macro-financial situation is putting unprecedented pressure on household budgets that will push the census of vulnerable families from the current 10.9% to around 14% solely due to the rate hike , a threshold not seen since the recession experienced by Spain as a result of the global financial crisis. Its census would reach a peak of 14.2% by then , only surpassed by the 16.6% that it shot up to in 2008 with another reality: the financial burden was then overflowing with the expanding economy and for all households for the joy real estate (more mortgages and more expensive) and a Euribor that came to exceed 5%.

Today, the troubles will come accompanied by a deterioration in the economy induced by the central banks to cut short an inflation whose damage threatens to become structural and leave almost permanent damage if it is not redirected.

The data is compiled from different analyzes by the Bank of Spain and its projections are for households with a high financial burden (they allocate 40% or more of their disposable income to repay debts) under the scenario of a rate hike of 300 basis points such as the observed (the Euribor already discounts it, with a climb from -0.497% last December to 2.436% on average at the price quoted in October).

The European Central Bank (ECB) has recognized that the price of money would go to 2.5% , but some experts point further if the CPI takes time to calm down. Its current dizzying heights are, in the end, the result of something as difficult to master as the war in Russia and the many tensions in prices of all kinds that the jam to international trade caused by the pandemic still introduces.

The vulnerability simulation is also partial and could fall short given that it does not include how much the inflation that is tightening everyone’s pockets will drain and the Bank of Spain itself already estimates that the CPI was causing a year-on-year fall of 3.1% in real disposable income until June, although it grew by 4.2% in nominal values.

“It is a perfect storm due to the union of inflation, the rise in interest rates and the issue of indirect taxes, which are powerfully taxing us all. Hence the increase in collection that reaches the State,” explains Antonio Pedraza , president of the Financial Commission of the General Council of Economists. “There is also another problem, and that is that the banks see a greater delinquency and doubtfulness in loans and, in this sense, they are going to close a lot to the granting of new loans. Then the issue, with these four situations, is very worrying because it is overshadowing the purchasing power of families,” he adds.

The situation will complicate repayment for many families and defaults will surface. The escalation of rates by 3% will force the mortgaged party to scratch their pockets by 2,952 euros more per year, taking for this calculation a standard loan of 145,000 euros over 24 years and with the price calculated on the Euribor plus 0.92%.

In spite of everything, the financial sector and the experts consulted rule out repeating the dramatic situation experienced in 2012 thanks to the fact that the starting reality has nothing to do with it, although the families that were fair will have a hard time with their debt and may not even face it, but Precisely today there are tools that did not exist at that time.

“When interest rates rise, there is always a group of people and families, those who were on the margin, who now stay below the waterline, but the conditions for the set of households are quite favorable. Nothing to do with the previous recession because the volume of indebtedness is much lower and, furthermore, interest rates are not expected to rise to the levels at which they were at the beginning of the previous recession”, repairs María Jesús Fernández, senior economist at Funcas.

Household debt today represents a figure equivalent to 58.4% of GDP , below the European average of 60.1% and far from the 85.6% of the real estate boom. When that bubble burst with the financial crisis, the Euribor went from more than 5% in 2008 to 0.57% with the successive ECB rate cuts to help the economy, but in 2012 it still reached 1.87% in some months .

There is no bubble to burst
The Funcas expert recalls that the average burden on the whole of indebted families, that is, what they have to pay for amortization of capital and interest on their disposable income “is at a minimum for everything we have been in this century.” This financial burden was 15.6% in 2020 according to the Bank of Spain Financial Survey, compared to the record 19.1% reached at the peak of the mortgage business in 2008 . In addition, she emphasizes that in the previous crisis, “the economy had to make a very strong correction” and “a lot of employment was destroyed” when brick-related businesses fell.”Now there is no bubble and there is not going to be a correction of the economy and such a severe crisis and, therefore, there is not going to be such a hard impact on employment, far from it”, she illustrates, convinced that ” households, in general, are going to be able to absorb this impact”.

“There is a positive side to this crisis. We do not expect a generalized and massive increase in unemployment, which would aggravate the situation even more”, agrees José Emilio Bosca, professor at the University of Valencia and Fedea researcher. The Government has projected that 2023, when the GDP is expected to suffer its greatest correction due to the rate hike, will end with increases of 1.4%. “If this is fulfilled and if we have positive growth, employment is not going to be damaged,” he confides, also acknowledging that “this does not mean that many of these families who are at the limit can be very negatively affected.”

In a positive key, it also recalls that the laws, mechanisms and measures created precisely to mitigate problems or address them in the previous crisis will help to resolve problems in many situations, such as the case of restructurings required through the Code of Good Practices. “There is an obligation to negotiate with the bank, to seek solutions before reaching situations such as having to raise assets or things of this style,” he points out.

More expensive mortgages, less credit and rents through the air
The trouble for families is not exhausted with the escalation of rates and Euribor. From the financial portal iAhorro, he underlines that the rise in the CPI affects “the shopping basket , it is that, in the end, what citizens spend more money on from their salary: to the usual purchase and they are left with less money , for example, to deal with other things such as housing”.

Rents are also rising despite the 2% cap set by the Government and “all the new flats that are coming out for rent are already coming out with much higher prices “, especially in big cities like Madrid, Barcelona, ​​the Basque Country and Balearic Islands, warns Laura Martinez, spokesperson for iAhorro. In addition, families are dipping into their savings piggy bank, so that the combination of lower savings and tighter budgets will bring, in his opinion, that “people who want to apply for a new mortgage will have it more difficult” and he sees feasible that the financial entities limit the new concession and harden it.

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