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Are you willing to take on 100% debt? Beware, it is not the solution for young people looking for an apartment


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The Conversation

Álvaro Bañón

Professor at School of Economics

The Spanish Government has just announced that it will guarantee, under certain conditions, young people who do not have enough money for fill in the 20% of the amount of the house that the banks do not grant as a mortgage loan . One of the golden rules of banking is not to grant a mortgage loan for an amount higher than 80% of the appraisal of the house. This is a risk control measure.

It is important to note that the State guarantees the bank to lend the remaining 20%, but the young people will be the holders of loan. The debt will therefore belong to the young people, who instead of borrowing 80% will borrow 100%, and therefore the installment will be higher. This seems to be a good measure, since it implies that young people who do not have sufficient savings for that 20% will be able to access their first home. But it is only apparently good.

Prices could rise

If the main problem of housing is its high price, this measure will simply push prices up. It will feed a demand that did not exist until now, and developers or second-hand sellers will see that, for the same supply, there are more buyers with more money. What will they do? Raise prices.

So what's the solution? More supply. More apartments, more land available to build. That developers or second-hand sellers have to stick together to sell the apartments. This is the only way to lower prices.


But that is not the main drawback of the measure. The main danger is that we fall into the same mistakes as in 2008. One of the causes of that gigantic crisis was over-indebtedness. Banks (especially American banks) abandoned their habit of only granting as loan 80% of the value of the house and started to give as loan the equivalent of 100% of the value of the property.

Why did they do that? Because they relied on the popular belief that "the brick never leave". Thus, whoever could not afford the (huge) payments, would sell the house, which would already be worth more and pay the loan. It was demonstrated that the brick leave exactly or more than any other investment, with the aggravating factor that it costs to maintain and, above all, that it has much less liquidity. And the brick leave so much that it is now, in 2024, when in many cities in Spain the square meter is reaching 2007 prices.

The best solution is to increase supply

In the years prior to the bursting of the bubble, banks lent 100% of the value of housing and the price of housing continued to rise. When the labor market suffered, many mortgage loans were defaulted on and the market was flooded with apartments for sale from one day to the next.

What happened? That the owners were desperate to sell and pulled prices down and realized they owed more (quite a bit more) than the house was worth. They sold (mis-sold) the house and still owed money. That is why, among other things, the initial debt should not exceed 80% of the market value of the property: so that there is a "cushion".

With this measure, on the one hand, demand will be "primed" and prices will be pushed up. And, on the other hand, young people will be indebted beyond their means.

The solution, as we have said, is to help prices come down by encouraging supply. More apartments, lower prices. It's always about supply and demand.