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Spain and UK banks are most vulnerable to real estate risk

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Spain and UK banks are most vulnerable to real estate risk
The main weakness when it comes to Spanish banks is the number of variable mortgages in the country, according to Fitch. Photo: Biel Morro/Unsplash

The Spanish and UK banking systems could be more exposed to risk when it comes to real estate investment, a new report by leading credit rating agency Fitch reveals.


Spain is one of the world's most popular countries for foreign property buyers, particularly those from other European countries.

READ MORE: Foreigners are paying more than ever for property in Spain

But existing Spain homeowners, as well as those considering purchasing a home, should be aware of the economic risks and downsides. 


The Spanish and UK banking systems are the most vulnerable when it comes to real estate investment, according to a new report by Fitch Ratings, one of the world's "big three" credit rating agencies.

This is largely due to the rise in interest rates and their higher borrower risks.

The recession in the UK and economic slowdown in Spain, plus the high rates of inflation across Europe and an increase in unemployment will mean that banks will come under increasing pressure in 2023, making it even more difficult to secure a mortgage.

ANALYSIS: Is Spain heading for a recession?

However, the report confirmed that the situation would not be as dire as during the financial crises of 2008.

Fitch ranked ten Western banking systems (UK, Spain, Australia, Canada, the Netherlands, Germany, France, the US, Italy and Denmark) that were vulnerable to real estate risk based on customers’ susceptibility to rising mortgage rates, real estate price risks and banking system vulnerability.

The UK came in at number one, being the most vulnerable, and Spain was number two. The UK scored the worst in the borrower risk category, while Spain scored worst in banking system vulnerability.

The countries with the lowest risk according to the study were Denmark in 10th position and Italy at number nine.  

Spain and the UK have the highest percentage of variable and fixed-rate mortgages that expire or reset within 24 months.

READ ALSO: How to change from a variable to a fixed mortgage in Spain


The main weakness when it comes to Spanish banks is the number of variable mortgages in the country, which can cause problems when interest rates are high. Even though Spain may start out in a better position than countries such as the Netherlands, Germany and Canada, those countries have more borrowers with fixed mortgages who will not be so affected by the rise in interest rates.

Spain and UK are also the countries out of the ten on the list where households have the least amount of savings, so are unable to pay for a significant increase in their mortgages.

Spain’s banking system is also vulnerable as a result of the country's chronically high unemployment levels and the prospect of it rising whenever the economic situation worsens.

On a more positive note, Spain seems to have less real estate risk compared to some other countries such as the US, where the pandemic housing bubble is currently bursting.

This stems from the fact that housing prices are not expected to fall in Spain so much as in some other countries, where they are overvalued because they rose during the pandemic.

In Australia, Canada, Denmark, the US, the Netherlands and the UK, prices are already falling in 2022, the report points out.

The report also shows that Spain has some of the most comparatively expensive properties out of the 10 countries when you take into consideration the housing prices and the average household income.  

The average salary in Spain in 2022 is €24,009 per year, which works out to a gross income of €1,714.94 in 14 payments.

To conclude, the report states that Spain, along with all the other countries in the study, has better capabilities to deal with a crisis within the real estate sector now than it did in 2008.

Since then, credit requirements have tightened, and banks are subject to greater scrutiny by regulators.

But the report states that Spain is worse positioned than others to mitigate the effects of a real estate crisis, such as insurance where banks protect themselves from mortgage defaults.

READ ALSO: How Spain will help homeowners with rising variable mortgage rates

In contrast to this, Fitch also praised the special agreement that the Spanish government and the country's banks made to introduce a set of measures to help protect more than one million low and mid-income families from rising variable mortgage rates.

This measure "could be used in other jurisdictions" it stated and will allow for "reducing total defaults at the cost of increasing the value losses of banks". 


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