Real Estate Bubble Arrives in Portugal

15 April 2018

Housing prices in Lisbon, Porto and Algarve are already above desirable levels, sounding alarms. A possible solution to the price growth is to increase housing stocks in these regions. The rest of Portugal, however, is free from the threat.

The real estate sector had “its best year ever” for real estate transactions in 2017, and indications are that the trend will be maintained in 2018, breaking new records. SOL contacted a number of experts and their opinion was unanimous: “If all goes well and nothing occurs that could negatively influence the market’s soundness, such as possible measures regarding local housing laws, forecasts are for growth of around 30% in 2018.”

However, there are already some areas, such as Lisbon, Porto and the Algarve, where prices are higher than desirable and, according to the same experts, “there are potential real estate bubbles in those regions.”

Luis Lima, president of the Portuguese Association of Realtors and Real Estate Agents (APEMIP), notes the high level of asymmetries within the Portuguese real estate market. “There are problems that focus on the highest-end areas of Portugal’s main cities, but the only way to solve it is through an increase in housing stocks,” Mr Lima stated to SOL.

Reis Campos, president of the Portuguese Construction and Real Estate Confederation (CPCI), believes that the real estate bubble is limited to Portugal’s two principal cities. “It is true that there has been very rapid development, particularly in certain areas of our main cities, linked to greater demand from investors when prices were artificially low as many of the now high-end areas were abandoned and degraded,” he said.

For now, experts rule out the existence of speculative real estate prices in the country as a whole. “The market is functioning normally, governed by the laws of supply and demand,” Mr Lima added, stating that “the absence of assets in the market, especially in the main cities, is causing prices to rise in certain areas of Lisbon, Porto and the Algarve,” while noting that the country must be viewed in its entirety, not just focusing on specific regions.

The challenge, according to Mr Lima, is to increase the supply of housing in the city centres, especially in the low and middle-income segments, where supply is increasingly scarce, and demand is growing continuously. However, APEMIP’s president emphasised that the prices in these cities are still far below those practised in most other European countries, which makes the Portuguese market attractive for foreign investment. However, the executive adds: “We must take into account that the income of Portuguese families is not equivalent to income in these other countries.”

However, Reis Campos believes that “urban rehabilitation has not yet gained the necessary dimension, rentals are almost non-existent and the imbalances between supply and demand, rather than diminishing, are increasing. As a consequence, the real estate market is out of balance and unable to meet the current levels of demand.”

CPCI’s president also believes that the Portuguese real estate market will eventually stabilise. Nevertheless, he stated that ‘we must monitor the international situation and while it is impossible to predict the future, we must also recognise that the national real estate market, on a global basis, presents relatively moderate risk levels.”

Growth is cyclical

However, the truth is that the growth of this sector is cyclical and, historically, there have been profound crises, followed by marked growth. In 2001 there was a peak in the market, with the approval of more than 114,000 licenses for new dwellings, followed by a continuous decline. Over the next 13 years, the market fell by 94%. In 2009, influenced not only by the subprime crisis but also by economic instability as well as the drastic tightening in credit flows, the sector hit bottom. The retraction lasted until the end of 2013, and during those four years owners who wanted to sell their properties had significant difficulties. The lack of activity in the market put pressure on prices, which fell to historic lows.

At the beginning of 2013, the market gained a new lease on life, linked to the creation of programs designed to attract investments, such as the non-habitual resident tax program and golden visas. “From that point on, the real estate market began its slow recovery, boosted by increasing internal demand, which was stimulated in turn by the improvement of economic and labour conditions and by the return of credit, albeit with heightened restrictions and low-interest rates,” Mr Lima stated.

Despite the growth in the sector, Reis points out that the market has yet to return to pre-crisis levels: “In 2017, approvals for 14,044 new dwelling were granted, 107% more than in 2014, but about eight times less than in 2001.

What is certain is that nothing lasts forever. While the market may still have a few years of future growth, experts argue that real estate bubbles are a fact of life and happen recurrently. About eight years after a major recession, as the recovery is reaching its peak, we may be in store for a new phase of economic disruption.

Euphoria fuels construction sector

Growth in the sector has also led to the emergence of new companies, especially in the mediation market. Last year, 1,385 new mediators were licensed, 30% more than a year earlier. However, this increase can also cause problems, Mr Lima warned. “Along with serious companies, which meet all the legal and licensing requirements, there has also been a proliferation of professionals and companies which act completely outside the law, calling into question not only the sector’s credibility but, above all, putting consumers security into risk.”

Against this background, APEMIP’s president argues that there is a need for tighter regulation, “to identify and punish those who act outside the law,” adding that “this leads us to press for self-regulation carried out in partnership with the state to guarantee greater transparency and security.”

The construction sector is also benefiting from increased demand in the real estate sector as the heightened activity fuels demand in a market that had been stagnant. However, problems still exist. The president of the Association of Construction and Public Works Companies (AECOPS), Ricardo Pedrosa Gomes, assured SOL that the growth “is not translating into an improvement in the profitability and economic health of construction companies because the prices are low, with unregulated competition, as gains accrue to developers and owners rather than builders.”

Forecasts are that the construction sector will continue to grow during this year, albeit at a slower pace than in the previous year as construction costs rise due to the scarcity of skilled labour. “Growth of 4.5% in the production of the construction sector is expected in 2018, which, although that is a reduction from the previous year when growth is expected to have reached 5.9%, is still the second fastest growth in the period from 2001 to 2018,” he noted.

According to Ricardo Pedrosa Gomes, the total production volume of the construction sector is expected to exceed 11.7 billion euros in 2018, as the building segment grows by 4.9% to 6.1 billion euros, and the civil engineering segment increases by 4% to €5.6 billion. ‘The continuance of high levels of production by construction companies will be sustained by the maintenance of considerable growth in the real estate market and an increase in the implementation of projects carried out under the banner of Portugal 2020,” the executive stressed.

These figures are in line with CPCI’s belief that “the capacity to attract domestic and foreign investment, the extension of urban rehabilitation to the country as a whole, together with tax stability and competitiveness and strengthening public investment are essential to the realisation of continued growth.”

Original Story: Sapo – Sónia Peres Pinto

Translation: Richard Turner