Real Estate Market Barometer - September 2022

Let's be clear, without housing credit it would not be possible for many Portuguese people to enjoy a basic right: to have a roof and adequate living conditions. The ECB has just announced measures that will increase the cost of this credit. And warned that more increases are coming!

After a 0.5% rise in July, a 0.75% rise in the ECB's key rates follows. The biggest increase in a decade! And it won't stop there, after the 75 basis points announced, analysts predict an increase of 50 points, both in October and December 2022 . Interest rates would thus reach 2% in February and there is already talk of director rates in the order of 4% over a period of 3 years.

Considering that in Portugal the use of mortgage loans is widespread and has been growing in recent years, basically since 2014, in line with the growth of the real estate market, it is easy to predict that these measures cannot fail to have a negative impact on the near future.

Although the number of housing loans granted in the years prior to the 2008 crisis has not yet been reached, the numbers have been growing since 2014. The big difference is that, in absolute terms, the value of credit granted has risen, because in the meantime the price of houses has increased, ie the level of indebtedness is higher.

According to the 2022 Housing Credit Barometer, of the ComparaJá platform, based on the universe of 7,000 users who used its financial products comparison service, we can see that:

• On average, the Portuguese borrowed €186,000 to buy a house during the first months of 2022.
• 37% of housing loan applications are submitted by people earning up to 1000 euros per month ;
• 49% of individuals are between 26 and 35 years old and only 23% are over 40 years old. That is, most are young people ;
• 4 out of 10 of the requests refer to a loan duration between 36 and 40 years ;
• As for the value of the installment, 34% of applicants admit to paying a maximum of one installment of up to €400 per month .

That is, looking at these numbers and at the profile of home loan applicants: about 1/3 is young, they want long-term loans (the interest payable is higher, which means greater indebtedness), has low incomes and accept a high rate of effort . However, this profile will not be very different from the beneficiaries who have enjoyed this type of credit in recent decades.

The high effort rate is one of the risks that the ECB has been warning of, but which still affects a huge share of beneficiaries. There are ways to circumvent the limitations imposed by banks (namely through consumer credit), which allowed many Portuguese to overcome this limitation and obtain loans close to 100% of the value of the house.

In short, with inflation reaching the highest levels of the last 30 years, house prices hitting successive record highs, interest rates growing as has not been seen for many years and the restrictions on credit imposed by European banks, we are facing a perfect storm, which cannot help but worry us, and it is foreseeable that it will have a serious impact on the real estate market.

The problem is that alternative solutions to buying a home using credit are not plentiful. The rental market continues to push the value of rents upwards and no declines are expected, not least because the contribution of inflation to the value of rents will tend to further worsen this scenario. The state's response to affordable housing or the construction of new price-controlled homes has been slow and heavily dependent on the PRR, whose progress is significantly delayed.

What awaits us in the coming years?

Against this whole scenario, the forecasts are gray at best. But as with everything else, human beings have unlimited capacities to overcome difficulties, generate new solutions and build new opportunities. One thing is for sure, all difficulties are overcome, it's all a matter of time and reaction speed . Here are some of my predictions:

home loan

In view of the above, it seems obvious that the government has a serious problem to solve here. It is urgent to make a contribution in order to alleviate the foreseeable shock of interest rate increases. One of the initiatives that the Government may take may be a tax relief through the extension of the deduction of these interests in the IRS.

This measure already existed and remains valid for contracts established before 2012, but was discontinued on that date. In this way, tax relief would return to all contracts signed after 2012: an estimated universe of 663 thousand housing credit contracts signed since then.

This does not prevent the difficulties in accessing credit from getting worse in the near future, for new contracts in view of the foreseeable increase in the rate of household effort.

Real Estate Mediation Market

In the last 8 years, we have witnessed an exponential growth in the number of agencies and professionals linked to real estate mediation. There is talk of almost 50 000, according to INE figures!

This increase in real estate consultants, which accompanied the growth of the real estate market, driven by the growth of tourism and the attractiveness of the country, is not sustainable . Many of my colleagues are not able to maintain a consistent salary to the point of building a solid career in this area. Some only engage in part-time mediation, others continue to hope for better times and wait, often supported by previous savings.

As a result of this excess of competition and the current shortage of properties, some of these new professionals are not performing professional work and are taking a "very aggressive" attitude towards their colleagues and their own clients. It's anything goes, motivated by the desperation of not being able to carry out transactions. Now this is not good!

What I predict is that a part of the agencies will close or join more resilient franchising brands, seeing their best professionals integrated as teams. Many other consultants will end up doing the math and realize that the average remuneration they get, after deducting expenses, is not rewarding in the face of the challenges of the profession and they will leave this activity, at least temporarily.

This whole environment creates an even greater challenge for consultants who make this activity their way of life. They need to communicate even more and better with their customers, to show them that the professionalism and investment made by them constitutes a value proposition that cannot be compared with " friends " and " paratroopers ", who are just looking for an "to make some change". Nothing moves me against those who are interested in embracing this profession, on the contrary, as long as they play fair, are professional and are willing to dedicate themselves wholeheartedly to a job that is very demanding and challenging.

Real Estate Sales Market

Property prices will go down. It's an easy forecast to predict, but not for all homes, not for all areas of the country, not for all segments of the real estate market.

New home construction companies (not supported by state subsidies) cannot and will not lower sales prices . The inflation of raw materials, the scarcity of urban land, the difficulties of municipal licensing and the predictable increase in wages of the increasingly scarce workforce, determine this.

The prices of renovated houses will not go down either, at the most they will suffer small downward corrections, depending on the area and the urgency of the respective owner. However, there is room for greater restraint here, not least because a renovated house is not a new house and investors will be more careful, either choosing less noble and cheaper materials, thus lowering the costs of renovation, or buying houses to renovate. at lower prices.

The number of foreclosed homes, due to non-compliance with financial and tax obligations, will grow again, as has happened in other crises. When they are placed on the market again, they will be placed on the market at lower prices, not least because the Bank or the State only want to recover the amounts owed.

Real Estate Purchase Market

For the reasons mentioned, those who decide to buy a property will have new opportunities, but also more difficulties:

• The current housing shortage is not going to be resolved in the short term . New construction is slow, as it depends on licensing that is slow and developers are more cautious, given the inflation that is affecting all types of construction materials.
• The greatest difficulty in accessing credit will push many buyers to the used home market, abandoning the dream of buying a new home (despite the clear preference of the Portuguese for the latter option).
• The high cost of land in city centers will push many inhabitants to the periphery, where house prices are lower. Electric mobility could help, as it is on the way to mitigating the costs associated with distance.
• The real estate market of banking and state auctions will attract not only investors, but also individuals in search of lower prices, even if they have to pay for renovation works.

Lease Market

Here the difficulties are expected to be even greater. The Government, in an attempt to stop the foreseeable increase in rents in January, decided to impose a maximum ceiling of 2% on the increase in rents in January 2023 . It is recalled that the annual increase in rents is in line with the value of inflation, which is expected to reach 8% in 2022. In July, the Harmonized Index of Consumer Prices - HICP was 8.2%.

If, on the one hand, such a measure could relieve lessees, it could result in an increase in the value of rents for new contracts, making a scenario that is already difficult and of great scarcity even more difficult.