Is a real estate bubble about to burst in Portugal?
The rise, the increase in interest rates and the rise in the cost of living have increased the earnings of an economic downturn.
A recent study, published in 2022, and cited by Nuno Rogeiroin your weekly comment space on SIC Notícias East West, raises the possibility that Portugal will be the first country in Europe where a real estate bubble will burst.
AN lack of financial literacyan arrival of foreignersyou effects of moratoriumsan ease of access to credit It is like low interest rates are some of the factors pointed out by the study of the Value of Sharesan American financial disclosure platform, which created for the formation of a real estate bubble.
But will the risk of explosion is real? Experts contacted by SIC Notícias admit that there are “some warning signs”Nonetheless “there are still reasons to think that this bubble is not happening”.
But, after all, what is a real estate bubble?
A real estate bubble happens when there is a “pronounced” price rise, that “makes them without any economic foundation”explains economist João Duque.
In other words, “prices cease to have any adhesion to fundamental values of construction cost plus commercial margin kindly, discounting future earnings from rents collected or which are based on a clear growth in demand”.
“Bubbles are formed when the only reason for the price is based on the expectation that in the future the good will be bought from us at a higher price without any of the higher reasons being observed”, explains João Duque.
Is there really a risk of a real estate bubble in Portugal bursting?
Yes and no, that is, despite the existence of this risk, “there are still reasons to think that this bubble is not happening”considers João Duque.
The economist points to a “only big concern” against this scenario: “The rise in interest rates that will hit those who got into debt more recently”.
Who bought a house or car recently and still have a very high amount of debtaccording to João Duque, these are the people who “they may have to sell their homes” because they cannot afford the rise in mortgage payments.
Already Natália Nunes, coordinator of the DECO’s Financial Protection Office, considers that there are “signs that cause concern”, also aspiring to “increase in interest rates on variable rate housing loans”, that will end up “putting pressure on family budgets, which are already constrained by survival”.
Even so, the DECO coordinator urges “caution”, explaining that there is “a big difference between a bubble that bursts and causes a generalized collapse of prices and a drop in prices where the market correctsdue to changing dynamics between supply and demand”.
João Duque despite recognizing that there is a risk of a “fall in property prices”, I don’t believe this “could correspond to a” bursting of a real estate bubble “.
“I believe more in a severe slowdown or even a slight reduction, but I don’t believe in a cataclysm”, he considers.
What “reassures”, for now, Portugal?
Economist João Duque points out five reasons that lead to believe that a real estate bubble is not happening in Portugal.
- THE price per square meter in Portugal, when compared to other countries, is still low. In other words, “many Europeans and now Americans can sell their properties, buy another one in Portugal and use the difference to improve their renovations”.
- THE construction cost remains very high, not only because there is a shortage of labor, but materials and raw materials do not show signs of devaluing.
- “Although the stock of existing houses is very high”, the “IMI is not high enough to dissuade landlords”.
- There are reasons that I believe the demand will continue. and “thus avoiding a sudden break that would correspond to the bursting of that bubble”. “The Portuguese market and Portugal, which was discovered by the Europeans a few decades ago (first the British, then the French), is now being discovered by the Americans.”
- THE number of people living in Portugal and working for non-resident companies is increasing. The sufferings of these workers allow them “to pay high rents and buy houses at prices higher than the average of Portuguese families, who work for Portuguese companies, can aspire to”.
Burst of the real estate bubble, housing loans and interest rates: is there a relationship?
According to data from the Portugal’s bank, 1.4 million families have mortgage loans93% of which have variable rate contracts.
Natália Nunes, from DECO, explains that the increase in swearing rates, as a measure to combat innocence, lead to a need for many families to go through painful adjustmentsnamely those with high effort rates and/or lower incomes.
With these increases in interest rates on mortgage loans, household budgets, which are already conditioned by survival, were even more suffocated.
However, it claims that “it is not expected that families, in general, will no longer be able to pay housing loans and lose their homes.” Still, it’s like “certainly many will have to make adjustments to their budgets and credits”.
The coordinator of DECO’s Financial Protection Office also says that, for this reason, “it is not anticipated that house prices will suddenly start to fall” and that’s why a bubble bursts. In addition, “on the supply side, house prices have been increasing significantly”, he adds.
Is mortgage renegotiation a good option?
renegotiate is a good option, says Natália Nunes, adding that “it is the option for those who have very high effort rates”. This possibility “allows the family not to enter into a situation of default”.
How to prevent the formation of a real estate bubble?
For Natália Nunes, from DECO, the “State can and should intervene” and gives as an example the package of European funds until 2029, which “contains large slices dedicated to Urban Rehabilitation”that can be used to reclaim the housing stock and create youth-friendly housing.
The easing of “norms relating to the renegotiation and lending of loans for own and permanent housing”for DECO, it is a measure “necessary”.
Natália Nunes also defends the “creation of a line of financing that supports families in the payment of mortgage loan installments” and states that it is essential that supervisory authorities “supervise and assess whether the measures recently implemented to mitigate the effects of the increase in Euribor are sufficient”.
For João Duque, everything that prevent “price drifting away from its fundamentals”such as “promoted credit without guaranteed repayment conditions”, “negative interest rates” or “difficulty in accessing rehabilitation or construction licenses”, will prevent the formation of a bubble.
And if a real estate bubble bursts, what could happen in Portugal?
Joao Duque claims that “would bring serious problems to the banking sector” and that this would be the “bigger and immediate problem”.
The main problems, explains the economists, would be at the level of “creating impairments and lowering their solvency levels”.
In addition, a wave of social protest could also begin, “with some possibility of social disintegration”.
What happened in 2008 can happen again?
“It is not foreseeable that there could be a real estate bubble collapse like the one seen in 2008.”
Natália Nunes, from DECO, explains that, despite the performance, she did not keep up with survival, the “labor market has low unemployment rates”which allows families to have “some income”.
Furthermore, I understand that, for some time now, the banks are coming “to restrict housing credit conditions and there are measures, since 2012, that oblige them to monitor the good execution of contracts by consumers, with a view to avoiding non-compliance”.