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Do Skyrocketing Housing prices in Portugal Point to a Bubble? The Banco de Portugal Responds

4 October 2017

The Banco de Portugal notes that investment in housing has grown well above the pace of economic activity. But most of the investments are self-funded and come from outside the country.

Investment in housing “is growing significantly above GDP” and “housing prices are expected to continue to rise well above inflation in 2017,” the October Economic Bulletin, published this Wednesday by the Bank of Portugal, stated. Does this mean that we are dealing with a bubble that could potentially burst and compromise financial stability? At least for the moment, there are no signs of a bubble, the central bank opined.

It seems that a perfect storm is brewing: investment soars in housing, prices rise (7.9% in the first half of 2017), many new loans for home purchase reached highs last seen at the end of 2010, and interest rates are at historic lows. Unemployment continues to fall, while wages remain contained.

At least for now, it does not look like history will be repeating itself. There is a new element in the equation: a significant part of the demand is led by non-residents, and a good portion of the acquisitions are self-financed.

The numbers

First, it’s important to regard the numbers cautiously. It’s true that the spreads on home loans charged by banks in June of this year were close to those reported in mid-2011.  But, the central bank bulletin said, they remain “far above those in the run-up to the economic and financial crisis.”

The same is true of new loan amounts. They have risen in the first half of the year and have kept up their momentum since the beginning of 2015. “Loan amounts reached highs since the end of 2010,” but “represent only about half of the amounts observed in the years before the crisis,” the report continues. Also, the value of repayments “continues to offset new credits.”;

And prices?

An increase of 7.9% is “significant,” acknowledges the Bank of Portugal, which reports that the losses recorded during the crisis between 2008 and 2013 have already been reversed. However, “in real terms, they are still well below the values observed in 2008.”

The rise in the demand for non-residents partly responsible for the acceleration in housing prices.

Banco de Portugal, Economic Bulletin, October 2017

This is where the bulletin identifies another critical factor: ” The rise in the demand for non-residents partly responsible for the acceleration in housing prices.” That is: part of the purchases is the result an injection of capital from abroad. It is, in fact, an influx of money that has primarily fuelled the renovation of real estate, created more jobs, allocated houses to local tourist accommodations, make leases available.

“The more recent trend of reallocation of the investment portfolio on a European scale, together with the existence of other incentives, notably at the tax level, may justify an increase in demand from non-residents,” argues the Banco de Portugal.

With inflation and interest so low, “this type of investment has become more appealing, reflecting the increase in its rate of return compared to other long-term investments, including lower risk,” the report explains.

As the central bank report suggests, there is still no evidence of a credit phenomenon: there is an increase in purchases, but there is no credit risk exposure because it is not being overfunded by bank credit. However, should this be the case, Banco de Portugal may be required to take measures. There are at least three limits to the granting of credit that can be triggered:

  1. Limits on the loan according to the value of the property acquired;
  2. Limits on the amount of debt service according to the income of the buyer;
  3. Restrictions on borrowing terms due to the age of the buyer.

Original Story: Economia Online – Margarida Peixoto

Photo: ECO – Paula Nunes

Translation: Richard Turner