New Construction Projects to Alter Housing Price Dynamic

7 January 2019

More than 49,000 dwellings were licensed in the last year and a half. This boost to supply will help stimulate a retreat in housing prices and force sellers to stop shooting for the moon.

The increase in the supply of new homes in Portugal’s principal cities is set to lead to a reduction in prices on the second-hand market, creating an impact already this year. Even so, the most significant impacts will be felt when some of the new projects are completed, with increased effects starting in 2020. An example of the new developments coming on the market is the Entrecampos project, which will also be the largest in Lisbon regarding the number of new homes.

The numbers speak for themselves: in the last year and a half, developers and individuals submitted applications to build or renovate more than 49,000 new homes on mainland Portugal. More than 80% of the total, or about 39,000 homes, will be new builds. The remaining 20% (more than 10,000 dwellings) are for rehabilitation projects, according to the latest data from Confidencial Imobiliário (Ci).

“Demand pressure and its effect on prices is generating momentum in the real estate development market, where expectations have led to the launch of an increasing number of new housing projects, in a scenario where the supply shortage continues to be one of the biggest limitations to market growth,” said Ci’s director Ricardo Guimarães.

Regarding the size of the homes under construction, one-bedroom, or smaller, flats account for 39% of the pipeline of housing rehabilitation in the last 18 months at the national level. In the case of new builds, larger homes are the norm. Three-bedroom homes account for 45% of the new dwellings under construction in Portugal.

The idea is shared by the consulting firm JLL, which guarantees that supply is already demonstrating greater dynamism and diversity, “which should lead to a price correction in 2019, smoothing out the increases, although the majority of the new homes are currently sold while still under construction.”

Also the Portuguese Association of Realtors and Real Estate Agents (APEMIP) believes that prices will already fall this year. The president of the association reasoned that: “I have said several times and in various public forums that house prices will not and cannot rise indefinitely. It is natural and possible that we will begin to see corrections to the value of real estate, because prices can only increase to where it is justifiable, and demand is high enough for the supply,” Luis Lima told i.

What is certain is that data from the National Statistics Institute (INE) in recent months have begun to show a deceleration in the market – even as prices are already far above those seen before the current euphoria in the real estate market. The latest data from the INE points to a reduction of 2.7% over the previous quarter compared to the third quarter of 2018. It is, in fact, the second consecutive quarter in which price increases have slowed down.

Limiting speculative pricing

For the CEO of Century 21, increasing the supply of new homes is the best way to reduce prices to a level that is better suited to the financial requirements and capabilities of the Portuguese. Ricardo Sousa acknowledged that in some of the big cities, particularly Lisbon, there had been some “speculative and almost irrational prices,” stating that the pricing is due to an excess of optimism on the part of property owners, who believe that they can sell their properties for unjustifiable prices.

Mr Sousa also criticised the opportunism of some owners who are inflating the price of their properties – a situation that, in his opinion, is prevalent in the centres of larger cities. “A number of new projects have appeared, mostly for the luxury market, at elevated prices as a result of their regeneration work in urban areas, which eventually led an increase in the price of older homes. These owners took advantage of the sales of rehabilitated houses to push up the price of their homes as well, even though they have not been similarly renovated and the products are not even comparable, he said.

The CEO of the real estate brokerage also stated that “the overwhelming majority of homeowners could lower their selling price by up to 10 percent” because the time it takes to sell has been increasing.

Lending restrictions

In addition to the increase in supply, the Bank of Portugal is also attempting to put a brake on the recent market growth, again leading to increased sales times and a possible reduction in prices. Moreover, though the bank’s measures are only recommendations and not requirements, the regulator has already stated that it could make the measures mandatory.

According to the central bank, financial institutions should consider the size of the loan vs the collateral put down, and the borrower’s expected effort rate when paying back the loan (monthly loan instalment vs monthly income) when evaluating any new mortgage applications.

In this way, the bank’s governor, Carlos Costa, recommended the concession of new loans only in cases where the client’s effort rate (for all existing loans) does not exceed 50% of their net income. He stated, however, that banks can exceed this effort rate by up to a limit of 5% of the total loan amount each year, reaching a customer effort rate of 60%.

The regulator also suggested that banks take into account, among other things, a possible 3% interest rate increase when calculating potential effort rates, to “prevent the expected rise in Euribor from increasing the likelihood of loans becoming riskier, leading to higher levels of non-compliance.”

Record year

Just last year, the number of transactions increased by between 15% and 20%, according to APEMIP. From January to September of 2018, more than 132,000 family homes sold, 19% more than in the same period of the previous year, with almost 46,000 transactions in the third quarter alone. The market for used houses accounting for an increasing share, in the absence of new supply.

Prices have responded to the lack of supply. According to JLL, prices have risen by more than 10% in the country and by 20% in Lisbon. According to INE’s latest data, three of Lisbon’s 24 parishes already have housing where the prices are above 3,500 euros per square meter. In Porto, the highest average prices reached €2,142 per square meter. The parish of Marvila in Lisbon was the only one to register a decrease in prices to 1,543 euros per square meter.

Original Story: Jornal i – Sónia Peres Pinto

Photo: Mafalda Gomes


Translation: Richard Turner