The end of a year is always a time to evaluate, reflect and learn from our experience and that of others.
But it is also time to try to predict what is to come, listening and reading the opinion of specialists, talking to market agents, combining all this with our own experience in the real estate market. This results in the adjustment (or not) of objectives and the planning of actions to be developed during the new year.
This is also our moment to share - with those who listen and read us - a summary of the main ideas collected and processed about what could happen in the Portuguese real estate sector in 2023, based on a recent reality:
What happened in 2022
In 2022, we witnessed intense activity in the real estate sector, with growth in the volume of business and growth in the number of transactions (+7.7%, according to data from the 3rd quarter of 2022, based on the number of transactions per house on Portugal mainland, source: Confidencial Imobiliário), in parallel with an increase in the average selling price (+16.4%, according to Oct 2022 data from the Housing Price Index, source: Confidencial Imobiliário). And all of this happened in a context of high uncertainty and even some disturbance at an economic and social level, namely as a result of our society and the whole world having very recently emerged from two years (2020 and 2021) marked by a viral pandemic, to which was added the outbreak of a war in the middle of Europe (Ukraine), with all the negative impact on it, its member countries and the rest of the world.
Additionally, as a result of this context, there was an increase in the inflation rate (-0.3% in Dec 2020 | 2.8% in Dec 2021 | 10.2% in Nov 2022 | source: Banco de Portugal). There was then an inversion in the European Union's monetary policy, using the gradual and successive increases of the Euribor (the European Central Bank's reference interest rate) as a measure to combat the increase in the inflation rate.
In Portugal, in years prior to 2022, the civil construction sector was already suffering from a strong shortage of labor, which was leading to an increasing and incessant rise in construction costs. In 2022 there are additional contributions to this rise: (i) the 'energy crisis' fundamentally created by the war in Ukraine, (ii) difficulties in terms of the supply chain of raw materials, and the aforementioned (iii) increase of the inflation rate. All this resulted in an increase in construction prices for new properties and the rehabilitation of used ones.
And last but not least, this being the generalized understanding of professionals in the sector: the supply of housing continues to be manifestly lower than demand, which is a structural (and not merely conjunctural) problem of the real estate sector in Portugal.
What can happen in 2023
There is a widespread expectation of some corrections and price adjustments in the sector. However, strong negative variations in prices are not expected at this time, only slight ones (-1.5%, source: BPI Research). However, in relative terms, this will be a strong 'braking', since since 2017 we have seen price growth above 8% per year.
Different behaviors are also expected depending on the analyzed segment ('low, medium or luxury', given the quality, or 'residential, commerce, services or industry', given the purpose) or even depending on the location of the property (urban centers versus peripheries or inland areas). And so it should be because there will continue to be a strong mismatch between supply (shortage) and demand (excess). These conclusions are analogous for the rental market, which will continue to not constitute an alternative to the purchase/sale market.
So where will the greatest risk to the dynamism of the sector come from in 2023? This will certainly reside in the maintenance of the inflationary rise in prices and the fight against it by the ECB via adjustments to the Euribor. Knowing that in Portugal the majority of active bank financing (for house purchase) uses a variable rate based on the Euribor as a reference for the financing interest rate and that financing with a fixed interest rate is much more expensive for buyers, then surely this additional cost will weigh on the pockets of those who went into debt to purchase a home and will make those who intend to acquire a property - to live or invest - withdraw and postpone an investment decision. The rise in mortgage loans costs will thus be the biggest economic obstacle to be overcome by the sector in 2023.
For those who do not want to or cannot postpone an investment decision, there may be a realignment of expectations, namely the location of the property to be acquired. It is predictable that there will be a 'displacement' of buyers and their investments to the outskirts of large cities or even to areas in the interior of the country, where property prices are more affordable. If this could be a reality (already visible in 2022), this will not affect, however, the investment decisions of foreign citizens or companies, which have, on average, a much higher purchasing power and a much lower dependence on bank financing.
But then, when can you expect a sharp drop in property prices?
This is the question everyone would like an answer to. But no one dares to formulate one with absolute safety and certainty. As mentioned above, a downward adjustment in prices is foreseeable for 2023, but no more than that. Higher degrees of price adjustment will depend on the evolution of the economic and social situation at national level and, fundamentally, at international level (inflation rate, interest rates, adequate and cost-controlled supply of energy and other raw materials).
The truth is that the expectation of a decrease in average sales prices has existed in our society for some years now, not least because the Portuguese market is in a counter-cycle with some of the most mature real estate markets in the world, namely the North American one.
But our real estate market is affected (contrary to a stagnant or pre-recession economy) by the impact of the following factors:
Supply (lower) does not match demand (higher).
The country is very attractive to citizens of other countries, as a place for investment (sufficiently mature market with affordable prices), as a place for leisure and as a place of residence (social tranquility, hospitality, culture, gastronomy, etc.).
The luxury real estate segment has skyrocketed in recent years and is expected to continue to do so.
There is a low level of unemployment in Portugal, which allows families to have more disposable income.
Families increased their savings (and consequent investment capacity) during the critical period of the viral pandemic (2020-2021).
National banks continue to be available (liquidity) to grant credit for house purchase.
Construction costs continue to increase, due to the shortage of labor (structural), but also due to the increase in the cost of materials (conjunctural).
Even so, or for that very reason, real estate will continue to be one of the safest and most profitable ways of investing money. As someone (Will Rogers?) already said: “Don’t wait to buy real estate. Buy real estate and wait.”
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