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Moody’s Warns That Housing Prices Have Reached Unrealistic Levels in Lisbon and Porto, But Still Denies the Existence of a Bubble

13 December 2018

Moody’s is predicting that housing prices will continue their upward trajectory in Portugal, though the increases in some of the areas of Lisbon and Porto are considered unrealistic. Even so, and although the level of risk has increased in some areas of the real estate sector in Portugal, the rating agency rejected the existence of a bubble.

Moody’s published a report on the conditions of Portugal’s real estate market, on Thursday (December 13, 2018).

“The housing market is accelerating at an unusual pace in these areas, particularly when there is a disconnect between income levels and housing price inflation,” the report said.

According to the report, market equilibrium risks being compromised if “buyers have unrealistic expectations about the extent to which prices will continue to rise in prime areas” of Lisbon and Porto. The report added that “in some places prices have already accelerated sharply.”

From the beginning of 2016 until June of this year, the average value of transactions in the municipality of Lisbon increased by more than 46%, bringing the cost of a 100-m2 house to 275,000 euros. Prices also increased by 34% in the municipality of Porto, and a property of the same size is now selling for 146,000 euros, according to the latest data from the National Statistics Institute (INE).

Moody’s concluded that the “higher level of foreign investment is also contributing to housing price inflation in Portugal.”

Recently, the Bank of Portugal (BdP) acknowledged that, in recent quarters, there have been signs of overvaluation of residential real estate prices in aggregate terms, “although they are limited.”

Banks to benefit from a stronger real estate market

According to Moody’s, however, the Portuguese banks are one of the main beneficiaries of the “stronger” real estate market, helping to salve some of the problems with bad debts.

The rating agency noted that the Portuguese banks’ “non-performing loan” (NPL) ratios would continue to improve as housing prices continue to rise and the economy strengthens, even if at a more moderate pace.”

According to the rating agency, “economic growth, higher credit recoveries, amortisation and sale of some NPLs” are leading to “substantial” drops in the levels of bad debt on the banks’ balance sheets, as seen in 2017 and the first half of 2018.

Despite this, NPL ratios in Portugal (12.4% at the end of June 2018) remain well above the 4% average in the European Union. Moody’s points to corporate lending, with an NPL ratio of 22.3% at the end of this year, compared to 4.9% non-performing mortgage loans.

Nevertheless, residential lending rose only “slightly” in the banking sector, despite rising prices and lower interest rates, the company concluded.

Original Story: Idealista

Photo: Fulvio Ambrosanio / Unsplash

Translation: Richard Turner