Once again we use credible information shared by Confidencial Imobiliário, to analyze statistical data updated in September (some) and October (other) about the real estate market in Portugal. And we also analyze data from other entities (I.N.E., Banco de Portugal, Pordata, etc.) to better explain the current situation and how we got here.
But at this moment, looking back will serve, above all, to better foresee trends for the immediate future, that is, the year 2024.
Let's do this?!
2023 was a year of slowdown in the price escalation that has occurred in the real estate market in Portugal in recent years. Which is not the same as saying that prices have fallen or are falling. Not even if there is identical behavior widespread in all regions of the country and in all market segments.
So what happens? Let's see:
Macro framing
Throughout 2023, there was a macroeconomic scenario of inflation rates higher than those outlined as desirable maximums (2%) in the European Union, causing restrictive monetary policies, with successive increases in the European Central Bank's deposit interest rate, which influences directly to Euribor (the last one occurred in September), as a way of controlling inflationary trends.
The younger generations in Portugal had not yet had direct contact with scenarios of inflation rates above 5%. Before 2022, the last year that recorded an inflation rate at these levels was 1994 (with 5.42%), with 2001 showing a rate above 4% (with 4.37%). More than two decades have passed since then...
Evolution of the annual inflation rate (IPC) - from 1960 to 2022
Thus, it appears that between 1960 and 1973 there was a progressive increase in the inflation rate (from 0.5% in 1961 to 13.05% in 1973) - with society suffering the strong impact of the presence and war effort in the former African colonies.
With the 25th of April 1974 and the consequent structural changes at all levels of Portuguese society, there was a period of strong price growth. Between 1974 (26.19%) and 1985 (19.55%) the annual inflation rate was always above 19%, reaching a 'peak' of 28.48% in 1984.
Portugal's entry into the European Economic Community (EEC) took place on 01/01/1986, but had been prepared for several years. This greater stabilization of the inflation rate and its placement at lower levels than what had been achieved in Portugal, was a condition placed on our economy. From 1986 (with 12.56%) until 2001 (with 4.37%), that is, until the eve of Portugal's accession to the Euro (on 01/01/2002), the country was led towards this necessary price stabilization , with the abandonment of some tools (namely exchange rate policies) and placing others in the hands of the European Union and its European Central Bank (namely direct influence on reference rates, such as Euribor).
Since then, for 20 years, the annual inflation rate in Portugal has always been below 3.65% (reached in 2011), and was even negative (deflation) in 2009 (-0.84%), 2014 (- 0.28%) and 2020 (-0.01%).
So what happened in 2022, so that, suddenly, the inflation rate reached 7.83% that year?
This abrupt growth resulted from the combined effect of several situations that occurred at an international level: (i) viral pandemic in 2020 and 2021 and its consequent effects, (ii) start of the Russia-Ukraine war in February 2022, (iii) energy crisis arising from that armed conflict and (iv) difficulties in the raw materials supply chain.
Now knowing that the European Union points to 2% as the percentage around which the inflation rates of each of its members should ideally be located (because it argues and defends that only in this way is economic and social cohesion between them possible, including also the necessary defense of the Euro as the single currency of most EU countries) and with this phenomenon of significant growth in inflation rates occurring to levels well above the desired percentage in most of its members, the European Central Bank adopted a restrictive monetary policy, progressively increasing its deposit interest rate, thus influencing the Euribor (ECB reference rate, calculated based on the average interest rates on loans made by banks in the Eurozone), in order to be able to influence (in the opposite direction) the rise in inflation rates more quickly. The idea was (and is) to make money more 'expensive', to discourage spending in the private and public sectors of its members.
Let’s see how Euribor has evolved over the years:
Evolution of Euribor at 12 months - between 01/01/2002 and 13/12/2023
Putting 2022 aside (as it was the year in which the inflation rate soared and Euribor, in a way, followed it...), we can see that from January 2009 onwards, Euribor was always below 2.5 %. Since December 2011 it has always been below 2%. Since July 2012 it has always been below 1%. And since February 2016 it has always been negative (!!).
So what about in 2022-2023?
Let’s look at Euribor’s most recent behavior:
Evolution of Euribor at 12 months - between 01-01-2021 and 13-12-2023
In the graph above, you can clearly see the first 'disturbance' in Euribor, resulting from the start of the Russia-Ukraine war (February 2022), and then starting its upward trend until October 2023, resulting from the international situation and successive adjustments that the ECB was trying to set to the remuneration rate on its deposits (and thus influencing Euribor), as a way of controlling the escalation of inflation in its member countries and, in a more or less generalized way, in the rest of the world's main economies.
Why is there a downward adjustment in the Euribor from October 2023 onwards (it is below 4%)?
European banks and other economic agents are anticipating today what is expected to happen in 2024: cuts in the North American Federal Bank's reference rates (already announced as very possible, although not yet implemented) and progressive downward adjustment the European Central Bank's deposit interest rate and, consequently, Euribor (although the ECB continues to use a very cautious speech, it has stopped talking about increases in Euribor, which has not been adjusted since September 2023).
The reasons are these: the decrease in inflation rates in the EU and the in the US is happening sooner than initially predicted. And although there are reasons for great caution, the truth is that many economies are stagnant and in need of some stimulus.
Take a look at the recent evolution of the inflation rate in Portugal:
Monthly inflation rate (IPC) - year-on-year variation - from Oct/2022 to Oct/2023
In other words, the year-on-year monthly inflation rate (month of a year compared to the same month of the previous year) indicates that the restrictive monetary policy (via manipulation of the Euribor) is having the desired effects on the inflation rate.
Real estate market in Portugal
But if this could be good news for 2024 (we will have to monitor the evolution of these indicators in the coming months), what impact did all this have in 2023 on the real estate market in Portugal?
The instrumentalization of the reference rate for a very significant portion of mortgage loans granted in Portugal (Euribor) generated a negative impact on those who had already obtained them or were planning to apply for them. Pressure on demand in the real estate sector has become inevitable. At the same time, there was no increase in product supply on the market (something that had been happening for some time), which maintained price growth, albeit at much slower rates, both in the selling and in the rental market.
Let’s look at these behaviors in more detail:
Residential sales volume (number of dwellings) in mainland Portugal
In the 4th quarter of 2021, a 'peak' was reached in the volume of housing sales in mainland Portugal (around 43,500 units). Since then, the volume of properties traded has been decreasing, either slowly (as happened in the 2nd and 3rd quarter of this year: -1.8% and -2.1%, respectively), or more quickly (as had happened between the 3rd quarter of 2022 and the 1st quarter of this year, with quarterly declines between 4% and 9%). Now, if in the 3rd quarter of 2023 it is estimated that 31,800 housing units were sold in mainland Portugal, this means a decrease of 27% compared to the numbers reached in that 'peak' of sales (in units).
Monthly, quarterly and year-on-year rates of change - Residential sales price index in mainland Portugal
And in terms of prices, how have they evolved?
Housing sales prices in mainland Portugal increased by 3.7% in the 3rd quarter of 2023. If we analyze the evolution of sales prices between January and September this year, we see that they grew by 10.1%. And we found that the year-on-year rate of change in Sep/2023 (that is, prices compared to those existing in Sep/2022) was 13.6%.
In terms of monthly variation rates, it appears that in October, average sales prices suffered a reduction of 1.2% compared to the previous month.
It was not the first time that there was a negative monthly variation rate (already occurred in September/2022). The post-pandemic period showed us more moderate price behavior, oscillating between 0.5% and 2.5%.
In the 3rd quarter of 2023, residential properties were sold at an average price of €2,239/m2, which means that the average price per property transacted was €232,395.
We know that inflation rates are decreasing, a little everywhere (i.e European Union and USA, the economies that most influence ours). But, for now, Euribor has not been reduced (it has remained unchanged since Sep/2023).
We now need to understand how prices will evolve at the end of the year, as well as understand any indications that may be given by the European Central Bank (on Euribor) to better envisage 2024 in terms of real estate market prices in Portugal.
Year-on-year rate of change - Residential price index
in Porto, Lisbon and mainland Portugal
Complementing the information mentioned above, we can see that there are different behaviors between Porto, Lisbon and the whole of mainland Portugal, even though they share the long-term trend (common to all since the 3rd quarter of 2022) of 'cooling down' in the growth of prices.
Thus, it appears that in Porto, the prices of transacted residential properties grew by 10.3% in the 3rd quarter of 2023 (compared to the same period in 2022), being around 6.4% in Lisbon and 13 .6% nationally.
It should be noted that although Porto shows slight growth (of 1 p.p.) from the 2nd to the 3rd quarter, it is in line with the price stabilization trend that occurs in Lisbon and nationally from one quarter to the next.
Sales price per house - in parishes in the city of Porto
And what is the behavior of the housing market within each parish in the city of Porto? Let's see:
The combined parishes of Aldoar, Foz do Douro and Nevogilde remains the area of the city with the highest average sales prices per m2, without significant variation between the 1st quarter of 2022 and the 3rd quarter of 2023 (i.e., in a 6-quarter interval).
The combined parishes of the Historic Center of Porto (the 2nd most expensive) and the combined parishes of Lordelo do Ouro and Massarelos (mainly this one) saw a reduction in their average prices.
The parishes of Bonfim (€3,079/m2) and Paranhos (€2,943/m2) surpassed the combined parishes of Lordelo do Ouro and Massarelos (€2,803/m2) in terms of their respective average sales prices per m2.
Note the significant growth in average sales prices in Paranhos (the parish with the biggest variation since the 1st quarter of 2022). The 'weight' of the sale of new homes in this parish has not changed significantly in these 18 months of analysis (it is between 20%-30% of the total number of homes sold). However, the parish is now very attractive for developers of new real estate projects, becoming one of the city's main destinations for offering new products, representing around 20% of the current pipeline. In other words, it was not the supply mix that changed, but rather the prices of that supply.
Still in relation to this pipeline, the Historic Center remains in the usual leadership (23%), with the parish of Campanhã becoming the third parish with the highest representation (17%) in the current pipeline of new products in the municipality.
Pipeline by municipality in the Porto Metropolitan Area - number of new dwellings
The municipality of Vila Nova de Gaia remains in the lead as the destination for the largest number of new homes launched on the market, which already happened in 2021 and 2022, with the municipality of Porto following closely behind.
In 2021 Vila Nova de Gaia was on par with Lisbon and Porto in leading this ranking at national level. In 2022 it has already become the main destination in the country for new construction, having presented 2,800 new homes with licensing requests, while Lisbon stood at 2,100 units and Porto at 1,650 units. In 2023 (data as of September), Vila Nova de Gaia remains in the lead nationally, now with 2,500 new homes.
In 2023 (data as of September) it is the municipality of Gondomar that has the highest growth rate (29% higher than the entire year 2022 and 90% higher than 2021), having even surpassed the municipality of Maia in the absolute number of new homes in pipeline.
These numbers and values calculated for Vila Nova de Gaia and Gondomar are part of what has been a phenomenon in recent years of investment relocation to markets with lower prices and higher appreciation rates.
And what has been the evolution of the rental market?
Residential rent index for new contracts
(base year: 2011 = 100)
After a widespread drop in the value of rents from new contracts, caused by the effect of the viral pandemic that had a strong impact in 2020 and 2021, in 2022 there is a significant growth in the residential rent index, caused by inflationary pressure, in addition to the anticipation (by landlords) of the effects of the brake on updating rents in 2023, along with other measures in the "More Housing" package. This effect was so impactful that between the 2nd quarter of 2022 and the 2nd quarter of 2023, rents (from new contracts) grew by around 30% year-on-year.
Residential rent index in Porto
(rates of variation %)
In the graph to the side, what was said above regarding the national market can be seen for Porto.
The rent values of new rental contracts in Porto, for used housing, reached €12.2/m2 in the 2nd quarter of 2022 and €14.4/m2 in the 3rd quarter of 2023.
It should be noted that around ten years ago, the average value of housing rentals in Porto was around €5.0/m2.
The average values reached in the 3rd quarter of 2023 are, let's say, a record value in the rental market in Porto. Therefore, we may be seeing a slowdown in the growth of rent values in new contracts, with discounts granted by landlords compared to the initially requested value increasing.
The Budget for 2024 approved by Parliament is already known: there will be no brake on the increase in rents (active contracts), meaning they could increase by up to 6.94%. Additionally, support measures will be applied to tenants. The intended effect is simply not to repeat the 'preverse effect' (because contrary to what was intended) of the end of 2002 and the beginning of 2023, when landlords were aware of the effects of the rent brake announced by the Government and the effects of rising inflation that year, significantly increasing the value of rents in new contracts. The market is given its (almost) self-regulation.
What about the supply of rental housing?
Well... it will be difficult (or even impossible) for 2024 to see a significant balance between the (little) supply of houses for rent and the (a lot of) demand for these same houses.
The measures of the "More Housing" program will take time to bring about changes to the current reality, the construction of housing at affordable prices, in sufficient quantity, is not possible in a short period of time, the reduction in interest rates (which conditions investment for placement in lease) are also not expected to be significant throughout 2024.
However, price stabilization is possible and certainly desirable (if it is not possible for them to fall), from a social and human point of view.
Mortgage loans: how has it evolved?
New home loan contracts
In August 2023, the third highest value was reached (€1,728 million), in terms of housing credit granted in the last five years.
Average installment - housing loans
(and respective components)
The average payment on home loan contracts reached €392 in Oct/2023, that is, its maximum value since Jan/2009. In this installment, the amortized capital represents 40% of the amount, while the interest component represents 60%.
This meant an increase of €6 compared to Sep/2023 (+ 1.6%) and €113 compared to Oct/2022 (+40.5%).
Default on housing credit
Does the combination of the volume of credit granted in recent years with the abrupt rise in interest rates represent a high risk for the sustainability of families, financing banks and the economy as a whole?
In theory, yes. In practice, as can be seen from the graph above, no. The non-performing ratio (NPL = Non Performing Loans) has been successively decreasing in recent years, having stabilized at around 1% in 2023.
Since the 'sub-prime' crisis in the USA in 2007/2008, which spread throughout the world, the banking sector has been subject to much greater control through national and international entities that regulate its activity. Shareholders and managers themselves act much more conservatively. In Portugal, limits were established on the maximum percentage of financing granted in housing loans (90%), the maximum age of the debtor (75 years), the maximum number of years of financing (37 years), among other measures.
Additionally, the Portuguese Government, in 2022 and 2023, implemented support measures for home loan borrowers, as a way of mitigating the negative impact of the abrupt rise in interest rates on contracts with variable interest rates. The Bank itself was active in opening up the renegotiation of its credits, in order to dispel scenarios of widespread default.
Let's prepare ourselves for 2024
In conclusion, our message is this: the year 2024 will continue to offer us challenges, for which we will have to be attentive and prepared. But there will also be opportunities, for which we will also have to be... attentive and prepared.
The inflation rate should evolve progressively and tend towards values around 2%. Euribor is expected to begin to be cut by the ECB in the second half of next year, but it is not expected to reach values close to those achieved over the last decade.
The real estate market will not be indifferent to this macro-economic scenario.
There is demand for a supply that will remain reduced (by comparison) throughout 2024, but demand awaits encouraging signs regarding the evolution of Euribor. If there are convincing signs that it will reduce throughout the year, buyers will anticipate these expectations and enter the market. However, new construction may take on more weight in the total supply of properties. But it is not to be believed that the combination of these factors will cause a significant drop in residential property prices for 2024, which is why there are already some analysis and research departments of the main banks present in Portugal that point to an adjustment - downwards - in average prices of the real estate market between 1.0%-2.5%.
Do you need additional clarification?
Don't hesitate to contact me:
Marco Moura Marques
+351 967 035 966
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