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The Bank of Portugal Admits that Real Estate May Be Overpriced
6 December 2018
The Bank of Portugal (BdP) acknowledged that, in recent quarters, there had been signs of overvaluation of residential real estate prices in aggregate terms, “although limited.” At the regional/local level, however, there are areas where the phenomenon is already more pronounced, particularly in the cities of Lisbon, Porto and Faro. The trend is the result of high levels of tourism and direct investment by non-residents, as well as the recovery of the Portuguese economy, which contributed to the improvement of national and international investors’ confidence.
“It should be noted that the acceleration of residential real estate price between the end of 2013 and the first half of 2018 was shared by many euro area countries, in some cases accompanied by strong housing lending growth,” the regulator stated in its Financial Stability Report of December 2018.
In Portugal, housing loans granted by banking institutions are not, however, the main factor for the growth of prices in the residential real estate market, “since the total stock of residential loans is still falling,” though the pace is falling.
30% increase in five years
In the first half of 2018, housing prices in Portugal continued the recovery that started in the second quarter of 2013. Since then, and up to the second quarter of 2018, prices have increased by 33% in real terms, after falling by 26% between 2007 and 2013. Compared to the same period in 2017, housing prices increased by 10.1% in real terms in the second quarter of 2018, but there was a slight slowdown compared to the first quarter.
In cumulative terms, between the end of 2013 and the first half of 2018, residential real estate prices rose by about 29%, while housing loans declined in the same period by approximately 12%, according to data released by the BOP.
The acceleration in real housing prices in Portugal between mid-2013 and the second quarter of 2018 was shared with a large number of euro area countries.
“It should be noted, however, that the evolution of housing prices in Portugal in the period before the crisis was very different from that observed in other countries also affected by the financial crisis, particularly in the case of Ireland and Spain,” the Bank of Portugal stated, highlighting that “the residential real estate market in these countries was characterized by a significant overvaluation in the period before the crisis, followed by an abrupt adjustment, which was not the case in Portugal.”
High prices accompanied by more sales
The increase in housing prices in Portugal continued to occur in parallel to a significant increase in the number and amount of housing transactions.
In the first half of 2018, the total number of real estate transactions registered an increase of about 20% over the same period of the previous year (an increase of 30% in amount) and reached a new historical high.
“Transactions of existing properties accounted for 85% of the total transactions in this period. In line with the increasing number of new homes, transactions of new properties have been recovering, but at a slower pace than for existing properties.”
Foreign investors and tourism boost market
Demand by non-residents continues to boost the real estate market in Portugal, albeit at a lower level. Since 2012, there has been an increase in investment by non-residents, both regarding the number of properties and the number of transactions. “This trend cannot be dissociated from the introduction of a more favourable tax regime in 2009 for ‘non-habitual’ foreign residents and the approval, in 2012, of the golden visa program,” the Bank of Portugal noted.
The recovery of the real estate market “is also a consequence of the dynamic tourism market, which is boosting the demand for real estate by investors, in particular for local tourist accommodations.” In addition to the demand for housing, the increase in residential real estate prices reflects developments in the supply of real estate of this type.
In 2017, 8% of the properties sold in Portugal were acquired by non-residents, corresponding to 12% of the value of the transactions.
The average value of properties sold to non-residents was almost 50% higher than the average value of the overall transactions carried out that year. Compared to 2016, investment increased by 19% and 23%, respectively, regarding number and value. However, since 2014, the weight of non-residents in the total value transacted has gradually fallen (in 2014, the proportion was 16%).
In 2017, non-resident investors mainly came from France and the United Kingdom, which together accounted for 36% of the amount sold.
BdP calls for stability to minimise investor flight and promote rentals
Given the dynamics of the residential real estate market, “it will be important to promote a sustained adjustment to supply, and demand, which will address social concerns, efficiency in the allocation of resources in the economy and financial stability,” the central bank stated.
In this sense, the BdP argued that “the institutional framework impacting the functioning of the real estate market must be optimised and acquires stability, including at the level of the justice system, tax and market rules.”
This will give investments in this type of asset greater security and thus promote an increase in the supply of rental housing. “A functional rental market, with an appropriate balance between the rights of landlords and tenants, has the potential to promote a broader range of choices available to economic agents,” it argued, stressing the positive impact on the economy.
“For example, the reduction of the costs associated with geographical mobility, the promotion of urban regeneration and the creation of an alternative for savings’ investments.”
The institution led by Carlos Costa noted that, despite improvements, rati0s of private indebtedness in Portugal continue to be above the euro area average, stressing that “this issue is of particular importance in this market, given the existence of a temporary gap in the response of supply to increases in demand associated with the prolonged nature of the productive process in the construction sector.”
It will also be important for credit institutions to adequately assess the risks that arise when they take on exposures related to these assets in the face of more accentuated real estate valuations. “Although this is not yet a significant aggregate market situation, there may be more marked overvaluation in certain geographic areas and market segments,” the BdP concluded.
Original Story: Idealista
Photo: Ehud Neuhaus / Unsplash
Translation: Richard Turner