# Measure well to properly evaluate and decide
I begin this article with a bow to the work carried out by Ricardo Guimarães in elevating his Confidencial Imobiliário (CI) to an increasingly credible source of information – quantitative and qualitative – on the national real estate market. In these times we live in, in which it is very easy to turn mere guesses into (alleged) reasoned opinions, the CI becomes a tremendously important haven for anyone who works in this sector or wants to understand it properly.
Fortunately, this is not the only case, as there is a growing number of people and projects that try to give greater credibility and professionalism to the work carried out in the real estate sector, collecting, analyzing and sharing credible information and sustainable opinions (and not mere guesses).
In all my professional life I have never known business projects with positive long-term results, based on a structural logic, that were not based on effective measurements of reality and its variables, with permanent monitoring throughout the execution of the decisions taken, with the consequent necessary adjustments made throughout this process.
Yes, it is true that I dealt with entrepreneurs and decision-makers with a tremendous 'feeling' for their business. Decision makers with vision, who easily realized where they wanted or should take their business. And many of them got there, following the path that their "business man" instinct indicated as the correct one. But also many of those who reached that envisioned place, did so in a very inefficient way, wasting resources, compromising sustainability and negatively affecting many lives dependent on the good management of the business with which they became involved.
The business ‘feeling’ is very, very important. But when it comes to the good management of a multitude of resources, it is essential to know where we are, measuring the present reality, to understand how and where we should go in search of that envisioned ‘place’. And measure reality along the way, in order to be able to adjust the “how” and the “why”.
This becomes even more relevant and impactful when we are dealing with decision-makers and political decisions, where their impact is much wider. And if these decisions are not the most correct, then they can generate real “mini crises” within the sectors where they are taken or even at the level of the societies that receive their impact.
Recently (March 2023) the Portuguese Government proposed a package of measures, which it named “More Housing”, with the announced objective of increasing the number of housing available on the market, namely in the rental market, of reducing or reversing the growing trend in purchase and sale and leasing transaction prices, as well as mitigating the effects of increases in interest rates on housing loans.
The truth is that we witnessed, both in a previous phase of launching this program and after its launch, a set of disparate news, as well as news nonsense (supported by comments from those who had only a superficial notion about the subject), about the supposed causes of the current state of the residential market in Portugal. Expressions and ideas such as “real estate speculation”, “bubble in the real estate market”, “harms of foreign investment”, “local accommodation harms long-term rentals”, among others, have become frequent all over the place, namely in the media and on social networks.
I am not questioning here the existence of a foundation of truth in some of these expressions and ideas (because “where there is smoke there is fire”), but rather their decontextualization for reasons of ignorance or merely populist objectives, pointing to just a small part of the problem.
# What is at the root of the pressure on the housing supply
Let's take a closer look at what recent history tells us in terms of the evolution of some indicators that necessarily directly and indirectly impact the residential real estate market in Portugal.
It should be noted that, even though all this information has been available for a long time, the truth is that for most observers (the so-called 'public opinion'), this is what has been "discovered" in recent months through more detailed analyses. in-depth, involving those who work and know the sector well:
Portugal has invested heavily in tourism over the last few decades, through campaigns carried out internationally, and it has recently become a habit to see the country, and some of its main cities, mentioned and included in the international rankings of prestigious institutions. Its natural beauties, the number of sunny days, mild temperatures, the hospitality of its people, its gastronomy, security (since 2019 it is between 3rd and 7th place, among 163 countries, in the Global Peace Index ) and quality of life in general, are factors that seduce those who visit Portugal. The following graph shows the passenger traffic at Lisbon, Porto and Faro airports (in number of individuals) in the period 1970-2021:
Note: the sharp drop in 2020 and the low values of 2021 (years of the viral pandemic) in passenger traffic at Lisbon, Porto and Faro airports, have already been almost completely recovered in 2022, according to recent estimates (but not yet published).
Also as part of the strategy to open Portugal up to international tourism, in September 2009, with pomp and circumstance, Ryan Air officially opened its base in Porto. The first flight connecting to Portugal took place in 2002 (Porto-Dublin flight). But in October 2009 it made its first domestic flight, connecting Porto and Faro four times a week. It was clearly a significant leap in the intensification of the flow of international tourism to our country.
As an additional and complementary “tool” to encourage tourism in the country, local accommodation was regulated with DL No. 399/2008 of March 7 (later updated in 2014 and amended in 2018). Coincidentally, also in 2008, Brian Chesky, Joe Gebbia and Nathan Blecharczyk created AirBed & Breakfast in San Francisco, today known only as Airbnb, the company that came to revolutionize the sector. Since then, it has experienced significant growth, namely due to the ease of booking accommodation via online platforms. In 2014, Airbnb itself considered Portugal “one of the European leaders in regulating the sharing economy”.
The governments of Portugal adopted policies for granting visas to foreigners with a view to attracting foreign direct investment (FDI), offering counterparts, namely in the form of the so-called “Golden visas”, which allowed the obtainment of Portuguese citizenship through investment in real estate (clearly the route chosen by those who used this type of visa), transfer of capital and creation of jobs. The following table shows us the amount of residence permits for investment by purpose (acquisition of real estate, capital transfer and job creation) – A – and the respective amounts – B – in the period 2012-2022:
Recently (October 2022) legislation was created that grants facilities to “digital nomads” to reside and be taxed in Portugal under preferential conditions (550 visas have already been issued in the first 5 months since the application of the law).
Due to the combination of the aforementioned situations, the foreign population residing in Portugal would inevitably have to evolve like this:
20.514 in 1960 | 24.703 in 1970
50.750 in 1980 | 107.767 in 1990
207.587 in 2000 | 443.055 in 2010
661.607 in 2020 | 698.536 in 2021 (year of last census)
The following graph shows the foreign population with legal resident status in the period 1960-2021:
Note: the graph above shows a downward curve in the post-crisis years triggered in 2008, but this was sharply reversed from 2016 onwards.
The existence of a significant number of “vacant accommodation” (723,215 in 2021, according to the INE Census) was recent news (and launched into public opinion with all the fuss). However, its characteristics and its potential for placing on the long-term rental market, for example, are still not sufficiently known.
It will be essential to know these accommodations in detail, assess their capacity to increase the residential offer and create mechanisms that encourage their owners to sell or rent them and, thus, reduce the pressure on the offer.
It should be noted, however, that this alleged 'lack of knowledge' is difficult to explain, since the number of "vacant" already reached a 'peak' in 2011, having slightly decreased in 10 years. Uncertainties in data collection and statistical treatment... or inability (or negligence) over several years in approaching and taking measures in relation to this significant amount of properties?
The structure of households in Portugal has evolved considerably in terms of the average number of people, as well as the number that makes up each household. Thus, there is a considerable increase in households formed by 1 or 2 people, in contrast to the significant decrease in the number of households with 5 or more people, with the consequent pressure on the housing supply.
The following graph shows the average dimension of Portuguese households in the period 1983-2022:
In the graph above, we see that the evolution of the average number of people per household evolved from 3.3 people in 1983 to 2.5 people in 2021. The inversion verified in 2020 and the 'peak' verified in 2021 are related to the years of viral pandemic, which made many people return to their 'family nucleus'.
The table below shows the total population (B) and its breakdown (in percentage) into households of 1, 2, 3, 4 and 5 or more people, in the period 1960-2021 (data every 10 years ):
In the table above, we see that the total number of people in Portugal did not fluctuate much between 2001 (10,255,526 individuals) and 2021 (10,194,921 individuals), but households consisting of 1 or 2 people increased from a representation of 30.3% in 1960 to 45.7% in 2001 and to 58.1% in 2021. Large households of 5 or more people represented 29.1% in 1960, but only represented 9.5% in 2001 and 5 .6% in 2021.
That is, in two decades (2001-2021) with roughly the same number of people in the total population, the country now needs a higher number of residential dwellings for its households.
The number of University students has increased in recent decades, fundamentally in the 1990s, with the consequent need for greater mobility of a large number of students who will live far from their household, with the consequent pressure on the housing supply.
However, the significant rise in housing prices in recent years (leasing and buying/selling) has exposed a problem that had been forgotten and only remembered by public opinion in the months of September/October of each year: an insufficient number of beds, at affordable prices, to accommodate displaced students.
The following graph shows the number of University students in the period 1978-2022:
There is an increasing concentration of population in urban centres, to the detriment of rural areas, with the consequent pressure on the housing supply in these urban centres.
The current public housing stock is 2%, which puts Portugal at a low for many years and is clearly lower than the average for the European Union. However, there are those who disagree with regard to the comparability of these values, as shown by these interesting articles: https://observador.pt/opiniao/precisamos-de-mais-habitacao-publica-o-caso-particular-de-lisboa/ and https://observador.pt/opiniao/temos-falta-de-habitacao-publica/.
Taking out housing loans with a variable interest rate became popular from the mid-1990s onwards, after which there was a significant drop in the Euribor, with occasional increases, but soon followed by a downward revision, and with a long period in which it remained negative (2016 to early 2022).
The following chart shows the evolution of the Euribor in the period 1994-2022:
That is, around 1995, Portuguese society, in a phase of economic expansion (and with a real estate boom), practically stopped using the fixed rate on its mortgage loans. Banks even tended to stop offering it, enticing their customers with the prospect of lower installments in the future, depending on the prospects for the evolution of the reference rate for home loan contracts. It should be noted that at that time, the reference was still to Lisbor, since the Euribor appeared only on January 1, 1999.
The sudden rise in Euribor in 2022, used as a tool by the European Central Bank to control the inflationary trend, created new pressure on the housing market, making mortgage loans more expensive and creating greater demands in terms of investor yields.
All of this has put the housing market in Portugal under severe pressure: an uninterrupted rise in average sale and rental prices for several consecutive years (almost a decade), even surviving two years of the viral pandemic and abrupt (albeit recent) rate increases of inflation and interest rates, with the stock of real estate on the market at the lowest level for many years.
Care must now be taken to take the right structural measures to stimulate economic agents, in order to ease this pressure and lead this market to functioning levels and with fluid adjustment mechanisms that place it at the service of the well-being of the population.
Regarding the current situation of the real estate market and its trends for the coming months, you can read my article https://www.mouramarques.pt/post/conjuntura-atual-de-mercado-e-perspetivas-de-futuro-julho-2023.
Do you need professional support for making a good decision regarding your real estate investments?
Contact me and I will be happy to advise and support you:
Marco Moura Marques
+351 967 035 966
marcomouramarques@kwportugal.pt
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