The Bank of Spain is taking a closer look at lending practices as mortgage applications surge. This comes as a response to a sharp increase in new mortgage lending, according to the Bank's semiannual financial stability report. The central bank is developing a framework to set macroprudential limits on lending standards, aiming to prevent risky borrowing. However, any implementation would require further analysis to ensure the measures are suitable for Spain's economic conditions. The bank notes that mortgage conditions remain tight, with loan-to-value ratios only moderately increasing to 68.7% in the first half of 2025, similar to the average for 2004-2025. Despite this, vulnerabilities in the property market are significantly lower than before the 2007 housing crisis. The recent surge in mortgage loans, up 26% year-on-year in the second quarter, is still below the volumes seen between 2000 and 2008. Spanish lenders offer the second-lowest mortgage prices in the euro zone, with an average rate of 2.66% as of September, compared to the euro-zone average of 3.32%. Banks are trying to balance lower margins with higher lending volumes, driven by Spain's strong economic performance. Concerns about 'irrational competition' in mortgages have been raised by Santander and Bankinter, with some rates falling below market prices. The tighter monitoring of standards comes as home prices have risen in real terms, partly due to limited new supply, at an annual rate of 10.3% in the second quarter. Prices remain 17.7% below their peak in 2007, before the real estate bubble burst, leading to a 40% drop in property prices, increased unemployment, and a bailout for the banking sector. The central bank also warns that housing construction is still not keeping up with new demand in 2025.
