The ups and downs of the real estate market in 2023... until now.

It is August 2023 and, once again, the unknowns and problems that haunted the last 4 years of real estate activity in Portugal do not seem to be attenuating. Those who can boast gains and competitive advantages are only a small part of the market, and that's not good. However, hope is the last to die, and many are already looking to 2024 as the year in which, finally, the housing and real estate market will enter a level of stability. It will be?

My 1st Semester of 2023

When everything pointed to a difficult semester, it ended up not materializing as far as I'm concerned. This was without a doubt my best semester ever and June, July and August the best months of activity in my real estate career , short but already 7 years old.

In 2023, as had already happened in the past during the 3 years of the pandemic and confinement, the diversification of my real estate portfolio proved once again to be a key element of success. This year, the high and luxury segment has been on the rise and has helped to mitigate the recessive effects of difficulties in accessing mortgage loans. Obviously, this is a consequence of Portugal's attractiveness to foreign buyers.

For me, the months of June and July were months of leadership among almost 3,000 KW Portugal consultants. That's how I reached 1st place again in the Accumulated Individual Top, until July 2023. This is an achievement that I am happy to achieve, on an ongoing basis, since 2017.

Balance of real estate activity in Portugal in the 1st half

After Covid, inflation emerged, to which were added other difficulties that have worsened the climate of real estate activity and access to housing, in these last 7 months:

1. The shortage of supply, both in the market for the sale of new homes and in the market for new construction, helped to keep prices high. Not being a recent trend, the years of high sales between 2016 and 2019, largely due to tourism and international buyers, and which was joined by a very significant drop in the construction of new homes in the last decade, contributed to this shortage.
2. The rental market is in the streets of bitterness . Lisbon is one of the most expensive cities to rent a house in all of Europe! High prices due to the shortage of supply and the rigidity of the market, aggravated by the new rules for freezing rents and the leasing of vacant properties, which brought mistrust to owners and investors.
3. The escalation of rising interest rates on housing loans, which began in March 2022 (triggered by the war in Ukraine), does not seem to have ended yet. Euribor rates are at their highest since 2008.Since February 2022, the ECB has already carried out 8 consecutive increases in key rates. After 16 months, the provision of mortgage loans more than doubled and new restrictions on access to credit made it difficult to grant loans for the purchase of a house, with a greater impact on younger couples. .
4. The lack of labor and inflation have increased costs in the construction sector and brought new challenges to anyone looking to build a new home or renovate an existing one. This is a sector where more than a decade of emigration of qualified professionals, failure of companies in this sector, added to the impact of the pandemic, changed the landscape and forced the use of immigrants, many of them without the necessary experience.
5. The unfavorable fiscal environment is not new, but it has a significant impact on the formation of house prices. Regarding the final sale price of a new house, 30% of this value (or more) goes to the State, in the form of taxes and fees!

It could be said that the conditions are in place for an inflection of the fortunate cycle in the real estate mediation sector, with a predictable worsening of the conditions of access to housing. The diagnoses have been made for a long time; it is urgent to take measures at the government level to counteract this reality.

And the future? To God belongs...

Religious issues aside, hope, for now, centers on the new More Housing package, which has just been vetoed by the President of the Republic (PR), after being approved by parliament. However, the government will return the legislative package to the Assembly of the Republic, with final approval guaranteed by the absolute majority of the PS. Considering that this package has already been mischaracterized with successive amendments, it was expected that the Government would introduce some changes in the decree-law, in order to safeguard PR's criticisms. But no, it will be submitted and approved as is.

In my opinion, this legislative package has some advantages and disadvantages with a predictable impact. It seems to me that the balance will be negative in the short to medium term and above all it will not be able to significantly change the current scenario.

Main Advantages:

• Protection of current tenants, minimizing the impact of inflation on updating the value of rents (it is expected that in 2024 there will be a limit between 2 and 3% of current rents, below the 8% inflation), thus preventing the spiral of growth in new lace. On the other hand, the rent for new leases cannot exceed 2% of the highest rent charged in the previous 5 years (regardless of whether it is a new owner).
• Tax benefits for families. It increases the value of the IMI discount that councils can grant to residents, depending on the number of dependents. The deduction increases to 30, 70 and 140 euros, in cases of one, two, three or more dependents, respectively. Additionally, landlords will now pay an IRS rate of 25%, compared to the previous 28% (if they do not opt for income aggregation).
• Speeding up evictions in case of non-compliance .There are several changes to facilitate the eviction process, in case a tenant fails to pay the rent, namely through the new Tenant and Landlord Desk.
• "Licensing Simplex" with a view to simplifying, speeding up and reducing bureaucracy in urban planning procedures with a strong impact on the construction, alteration or expansion of houses, accelerating deadlines and simplifying processes.
• The express will to increase the number of State properties allocated to lease, at affordable prices from 2% to 5%, the average value of other European countries.

Main Disadvantages:

• Some of the benefits attributed to families in terms of renting come at the cost of a drop in landlords' income , which introduces a great penalty and distrust in this sector, leading to a decrease in supply and an increase in the value of rents . This feeling strengthened throughout this semester, after the public announcement and discussion of these measures, with many owners choosing not to renew previous contracts, preferring to put their properties up for sale. The results can be seen: when I put a house on the market for rent, it is rented in a few days, given the scarcity of offers. I receive requests from interested parties, national and foreign, to "beg" that "reserve the property until they visit or travel to Portugal", as well as proposals above the asking price.
• The coercive leasing of vacant houses (whose format has changed since it was announced) is a measure that, despite facing opposition from many city councils (which have already indicated that they will not resort to it), has generated alarm in the rental market with an impact that is difficult to predict. This measure has a term of 5 years.
• Tax benefits for urban rehabilitation end for investment funds. It is a measure of fiscal equity, but is expected to have a negative impact on attracting investment and urban regeneration.
• Local Lease (AL) is one of the sectors most affected by this legislative package. From the extraordinary contribution on the AL, through the cancellation of current licenses that do not prove recent activity, the reassessment of local accommodation records, the suspension of new AL licenses (except in the interior of the country), to the need for unanimous approval from the condominium for the attribution of new licenses.It is not foreseen that the owners of properties allocated to the AL will decide to switch to long-term leases, or sell them to the State, as the Mais Habitação Package foresees. They will more easily sell them or resort to the informal short-term rental market, as is currently the case.

In short, the mountain gave birth to a mouse and this More Housing Program, instead of being able to unite forces, divided and generated a loss of confidence on the part of landlords, investors, private promoters and professionals in the sector. Almost everyone, except the most deprived population or families at risk of default, seems to applaud this legislative package. In other words, instead of creating conditions to normalize the housing market, encouraging renting and boosting the new home construction sector, it generated controversy and created distrust in private partners. It confused the plan of social assistance (responsibility of the State) with the plan of real estate and economic activity (mainly the responsibility of private operators).

Real Estate Oracle ;)

"Even the washing of the baskets is harvest", says the people. Although the first half of the year is usually the strongest, the impact of interest rate hikes will continue to be the variable with the greatest weight in the evolution of the real estate market. In view of the above, my predictions point to the continuation of the current crisis in the sector, which will only not be more serious due to the interest of many foreigners in buying and renting houses in Portugal . These are joined by many Portuguese who emigrated and who now have the financial means and interest in investing in their country of origin. There is also a wave of immigrants, mainly from Brazil, who have come to work and stay and who are actively looking for housing in Portugal.

As for the main problem, the shortage of affordable new homes, I'm not very optimistic . The Government did not accept the request of many Municipalities for the conversion of rural land into urban land, in the perimeter of the main urban areas, namely in the AML. And without land at lower prices, and without a tax reform that reduces construction and marketing costs, many developers will continue to prefer betting on high segment developments, aimed at foreign buyers and investors in luxury properties.

Despite these dark clouds on the horizon, the measures related to the waiver of administrative licensing in favor of construction with prior information could have a positive impact on the construction, alteration or expansion of houses, in cases where there is a detailed plan, subdivision, when this have urban design and planning of urbanization and building works, these constructions being exempt from any preventive control.The government appointed a working group with the aim of moving forward with the so-called "Licensing Simplex", after the recent approval of Bill 77, which aims to simplify urban licensing, among other measures. This is a legislative amendment with a strong impact on the construction of new housing and which involves the revision of around 2000 legal diplomas and more than 300 municipal regulations, the RGEU-General Regulation of Urban Buildings dating back to 1951, the Legal Regime for Urbanization and Building (RJUE) and the Legal Regime of Territorial Management Instruments (RJIGT). It is not an easy task, not least because of the opposition already expressed by professional bodies and the National Association of Portuguese Municipalities (ANMP), but it seems to me to be a positive measure, long desired and in line with what is already being done in other European countries.

This lack of supply will continue to have a negative impact on the real estate brokerage sector, leading to the closure of many small agencies and the abandonment of careers by many professionals working in this sector, exchanging the instability in which they operate for other careers with more predictable income. It was something anticipated, as the number of 50,000 workers registered at INE is clearly excessive in view of the reality of the sector in Portugal.

Regarding prices, we will have different scenarios.

• In the new construction market, no price decline is anticipated . The increase in costs, despite the stabilization of inflation, as well as the scarcity of supply, allows promoters to maintain high prices, especially in areas of the country with greater demand: around Lisbon, Porto, Oeiras and Cascais, Madeira and Algarve.
• In the used home market, I anticipate that there is a tendency for prices to stabilize or even fall, especially in less valued areas, or where prices had already reached very high levels in view of the purchasing power of those interested.
• In the rental market , given the scarcity of products and taking into account the current climate of mistrust generated by the More Housing Package , no improvements are foreseen, quite the contrary ;).

In summary, the next 12 months will continue to be difficult for the real estate sector and for access to housing. If the global economy continues to grow and there is no unforeseen event to disturb the markets, I believe that in 2024/2025 the market will regain some stability, but still at levels lower than what we were used to, until 2019. And only with the launch of new housing programmes, with the collaboration of local authorities and private promoters, and with the fall in interest rates, it will be possible to achieve an offer of houses at more affordable prices for the Portuguese.