The International Monetary Fund (IMF) warned Spain that its real estate market is dangerously inching towards overheating as the housing industry faces growing questions about its financial stability.

“House prices have increased in recent years, although from a low level and without signs of a construction boom. While there is no clear evidence of a significant price misalignment yet, the authorities need to be vigilant. The set of macroprudential tools should be expanded to deal with potential financial stability risks,” reads the IMF’s annual report on Spain.

The IMF predicts that a 15% rise in real estate prices over the course of the last three years has been excessive and has pushed the market to rely on existing housing stock rather than new construction.

In 2017, Spain ranked 10th amongst the 27 EU members in terms of home ownership, with Germany ranking 23rd and Romania at number one. Since the 2008 crisis, home ownership dropped significantly after cash-strapped and debt-ridden Spaniards were forced to turn to the rental market.

Cheap liquidity has inflated housing prices across the EU, but the banks have become more cautious in recent years when it comes to lending. The expanded diligence on the part of lenders has become particularly acute in Spain. In 2008, €100 billion was lent by the banks to finance mortgages.

The IMF wants Spanish financial supervisors to be granted new powers to limit mortgage approvals based on home valuations. For years, the IMF has been insisting on a specialised monitoring agency that would focus on real estate.

The Socialist government in Madrid appears willing to oblige after the country’s economy minister, Nadia Calviño, is said to be working on a blueprint for an agency that would bring together the Bank of Spain, the CNMV national securities watchdog and the Economy Ministry. The Spanish government is also planning to tighten the terms for mortgage approvals to bring down inflationary pressure.