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The reality of the Portuguese real estate market against external forecasts

At the entrance of the last quarter of 2018, we will take advantage of our newsletter this month to analyze the relevant data on the real estate market that is currently available.

According to the Office of Studies of APEMIP (Association of Professionals and Real Estate Mediation Companies of Portugal), 86,335 family dwellings - real estate for housing - were transacted in the first half of the year, corresponding to an average of 477 transactions per day. In particular, the second quarter of the year was the best quarter ever recorded, with a total of 45,619 transactions in family housing.

Overall, sales represented an increase of 33.4% over the first half of the previous year, demonstrating that the Portuguese real estate market shows not only does not show signs of slowing down but is actually growing.

On the other hand, APEMIP also notes that the average sale time of a property is decreasing, since 85% of the properties placed on the market are sold in six months or less, and more than one third (37.7%) of the properties placed on the market are sold in under three months. The percentage of properties that take a year or more to sell is less than 5% of the properties placed on the market.

Although the market shows an unprecedented dynamic, there are naturally future factors of uncertainty, such as regulatory issues in the banking sector, the introduction of a new tax bracket in the Additional Municipal Property Tax, or the possibility of changes to the tax regime for Non-Habitual Residents.

The banking sector, in particular, has shown a particular appetite for credit for home purchases, with a sharp rise in new contracts during the first half of the year, totaling a turnover of 4,774 million euros in this typology of contracts alone.

The regulator (Banco de Portugal - BdP) has publicly expressed its concern over the growth of housing loans, not only at the amounts involved but also because there are signs of overvalued real estate in the largest cities in the country, following closely what is the understanding of the International Monetary Fund - IMF, which even warns for the formation of a "bubble" in real estate. At the same time, there was also a strong growth in consumer credit, which increases the exposure of individuals to defaults.

For these reasons, and taking into account a predictable rise in interest rates, the BdP made recommendations to banks to, among other measures, guarantee rates of effort of less than 50% and LTV (loan to value) ratios of at most 90% for permanent housing loans, with additional obligations for the banking institutions to justify non-compliance with these recommendations.

The understanding of the overvaluation of real estate by the BdP is contradicted by the European Commission, which at the beginning of September considered that the rise in prices in the Portuguese real estate market can still be considered as a correction of the low valuations that occurred in the past, not indicating in itself the accumulation of imbalances. On the other hand, real estate sources consider that the growing demand and the lack of supply in the market largely explain the increase in prices, combined with the stabilization of the financial system and increase of credits.

The European Commission goes further and points out in the report of its eighth evaluation after the financial assistance program to Portugal that the real estate market finds this growth mainly motivated by the inflow of foreign capital into the country, either through the granting of Golden Visas or adherence to the Non-Habitual Resident tax program, expressly removing a speculative "bubble" scenario and warning that it is expected that by the end of 2018 real estate prices in Portugal will continue to grow, and that only next year will the market begin to feel an increase in real estate supply, as a result of the recovery of the construction sector.

This, however, may not mean a change in the prices of housing properties. Given the current lack of supply of new real estate in the market, an increase in supply is expected to rebalance the offers of used properties (refurbished or not) and new real estate. Accordingly, current signs point towards residential real estate prices stabilizing and towards continued growth and vitality in the housing market in Portugal.