06 December 2023
Since the 1st quarter of 2015, only once has Statistics Portugal's Housing Price Index registered a negative quarterly variation. That was in the 3rd quarter of 2020, following the most prolonged and most severe lockdown any resident in Portugal has ever experienced.
This means that, for 34 consecutive quarters and more than 8 years, only the biggest pandemic in the last 100 years has contained the positive evolution of house prices in Portugal in a single quarter.
BUT WHAT HAPPENED IN 2015?
OR RATHER, WHAT HAPPENED BEFORE 2015?
In May 2011, Portugal borrowed 78 billion euros from the International Monetary Fund, the European Commission, and the European Central Bank (ECB), aid that had already been requested by Greece and Ireland in 2010 and which would also be followed by Spain and Cyprus in 2012 and 2013. The governments of these countries acknowledged to voters, investors, and other states that they might not be able to pay their debts.
We're talking about pre-bankruptcy scenarios. Since the cost of financing varies in proportion to the perception of risk it inspires, you can imagine that the interest rates charged to our country and national banks were high.
In 2008, any Euribor rates you were used to hearing about (3, 6, and 12 months) exceeded 5%. And until 2013/14, first under the effects of the mortgage crisis, and then in a scenario of the country's insolvency, access to credit in Portugal was stricter and more expensive.
THE LEGACY OF "SUPER MARIO"
The truth is that foreign aid mechanisms helped countries like Portugal gradually regain the confidence of investors who seemed more comfortable investing in Germany at the time. It may seem bizarre to remember this today, but at the time, in the face of a hypothetical collapse of the Euro, the prospect of keeping Marcos in one's portfolio seemed far more attractive than collecting Escudos or Drachmas.
Mario Draghi's famous speech according to which, "Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro", was followed by a series of measures, of which I would highlight the following:
1) Injecting money into the economy through medium-term financing operations for banks so that they, in turn, could make liquidity available to companies and individuals (more money available to lend, and easing the conditions under which this could happen).
Sound vague? In 2018 alone, according to the Bank of Portugal, 158% more credit was granted than in 2012, 2013, and 2014.
2) Stimulating the economy by buying public debt. By purchasing debt from Portugal (and other countries with less financial slack), the ECB has increased demand for these securities.
The demand for a given product generates a valuation effect for that good (for example, if more people are interested in buying a house, the perception of its value tends to increase). In this case - since we're talking about debt (a country receives a portion of money from an investor and commits, over a given period, to repaying the capital and paying a shared interest on it) - the perception of risk on that same loan decreases and, therefore, so does its interest rate.
This means that Portugal has managed to reduce the cost of its loans (according to Expresso, Mario Draghi's action will have saved our country 7.4 billion euros over 5 years).
So yes, if you had money in the bank earning close to zero, you had every right to hold Mario Draghi responsible.
But remember that it was also thanks to the actions of that Italian economist that you could pay around 1% (Euribor + spread) on a loan to finance the purchase of a house because the Euribor was going down. But also because the spread charged by the banks fell significantly. And both changes are also the result of Draghi's actions.
Low-interest rates represent a double pressure to increase demand for houses and, expectedly, their prices.
On the one hand, they make credit more attractive because, in a market characterized by variable rates, they dictate a low expectation of monthly charges (which is not necessarily true in the medium to long term, as we have all seen in the last year and a half).
On the other hand, they significantly reduce exciting investments in the financial market, which predictably translates into more real estate investors.
EVOLUTION OF 3/6/12 MONTH EURIBOR RATES
(JAN 2009 – NOV 2023)
Source: Triami Media.
EVOLUTION OF THE NUMBER OF RESIDENCES BOUGHT IN PORTUGAL
(1Q 2009 – 2Q 2023)
Source: Statistics Portugal.
WHAT DO THESE TWO GRAPHS TELL US?
An analysis of the curves in the two graphs suggests a robust inverse correlation between interest rates and house purchases.
In other words, the lower the interest rates, the greater the demand for a house and the corresponding granting of credit (and the precise opposite). This didn't happen only during the pandemic due to the extraordinary conditions we experienced during that period.
To get a clearer idea of the figures, in 2012, fewer than 63,000 homes were sold, and in 2013, just over 66,000. But in 2015, 2016, 2017, and 2018, around 91,000, 107,000, 129,000, and 151,000 homes were sold in Portugal, respectively. In other words, the fall in interest rates has allowed most people to fulfill their desire to buy a house, including those who, presumably, had been forced to postpone this intention during the years of the crisis.
There's another dimension that, because it's not easily measurable, is often undervalued: the country's growing visibility and the affirmation of its brand internationally.
Essentially, there are more tourists in Portugal and more people wanting to live here because Portugal is much more in the media than it used to be.
Can you remember the last time you had to explain to a non-European that Portugal is an independent country or that your mother tongue isn't Spanish? I remember: it was more than 20 years ago. And many of the world's population will agree that such explanations seem unnecessary today.
I would say that Portugal is attracting more people and investment because it has become a strong brand. Expo 98, José Saramago's Nobel in the same year, Luís Figo's feints, Euro 2004, the "special one", Durão Barroso's stay in Brussels, Ronaldo, and the efforts of various secretariats of state for tourism.
Siza Vieira, Souto Moura, other architects, artists like Joana Vasconcelos and Vhils, Ronaldo again, the textile sector, the footwear industry, Eder's goal, and the European title. Or the fact that Cristiano Ronaldo dos Santos Aveiro has become as or more popular than Madonna and that she (and many others) have decided to live here or buy a house.
Do the so-called golden visas and non-habitual resident status matter? Of course, they do. But let me be clear: they matter much less than this endless list of people and moments. And they wouldn't have had the same impact if all these things hadn't happened in the last quarter of a century.
I have little doubt that the "Ronaldo effect" is probably the first reason why, since the last decade, it's hard to conceive of anyone with internet access not knowing what and where Portugal is. And one thing is sure: to visit or invest in a foreign country, you need to 1) acknowledge its existence and 2) keep it in mind.
According to INE, in the 2nd quarter of 2023, 7.5% of homes were sold to buyers with a tax residence in another country. Generally, we see this indicator translated as the portion of houses in Portugal that foreign citizens buy, but personally (and I'm not alone in this conviction; some researchers are expressing it), this figure should represent an underestimation of the number of houses that people of other nationalities buy.
In other words, although there may also be some Portuguese emigrants buying homes with tax domicile in other countries, a significant proportion of foreigners already have their tax domicile in Portugal when they buy a home. In fact, the beneficiaries of the non-habitual resident status are a great example of this since the regime requires their main address to be in Portugal.
In any case, even assuming that this 7.5% is a reliable representation of the buyer market in Portugal (which it isn't, and this article categorically explains why), is this the only indicator we can use to try to gauge the impact of foreign buyers on the value of houses in Portugal?
WHAT ABOUT RENTING?
The pressure of foreign demand on housing prices is due to more than just the number of non-Portuguese buying homes in Portugal.
Ultimately, the market value of a house is a multiple of what it can generate on the rental market. And there seems little doubt that rents have risen sharply in some geographical areas due to foreign demand. From my professional experience as a real estate consultant (which, while a valid testimony, is also totally irrelevant from a statistical point of view), I would say that a rental in the center of Lisbon generates one contact from a Portuguese family every 10 or 20 contacts. Why is that?
Please look at this small survey based on the Idealist Real Estate Portal. On December 4th, 2023:
- Of the 1,018 ads published on Idealista for renting 2-bedroom apartments in Lisbon, 522 (51%) cost €2,000 or more.
- Of the 259 ads published on Idealista for 2-bedroom apartments for rent in Cascais, 146 (56%) cost €2,000 or more.
- Of the 390 ads published on Idealista for 2-bedroom apartments for rent in Porto, 98 (25%) cost €2,000 or more.
- Of the 101 ads published on Idealista for 2-bedroom apartments for rent in Matosinhos, 27 (27%) cost €2,000 or more.
I think it's relatively generally agreed that the overwhelming majority of Portuguese families can't afford a monthly rent of €2,000.
It's worth noting that Lisbon and Cascais, as well as Porto and Matosinhos, are the most expensive municipalities in the Lisbon and Porto metropolitan areas. But it is equally pertinent to remember that the average salary in these metropolitan areas in 2022 was €1,472 and €1,236, respectively. Please note that these 4 municipalities (out of 308 across the country) represent 11% of the total national population.
What I want to demonstrate is that even accepting that foreign demand only accounts for 7.5% of sales, it has a significant impact on house prices in some places in the country because:
- 1) As we have seen in the chapter dedicated to SUPPLY, foreign demand is enough to shape the typology of housing supply in some geographical areas. Much of the new construction available in the metropolitan areas of Lisbon and Porto is geared towards a high-end segment, for which a good share of foreign buyers is assumed, which seems to be validated by Statistics Portugal when it tells us that "in the metropolitan areas of Porto and Lisbon, the median price (€/m2) of transactions carried out by buyers with a tax domicile abroad exceeded the price of transactions by buyers with a tax domicile in Portugal by 61.3% and 91.6%, respectively".
- 2) Housing prices are also leveraged by rental values, which, in some municipalities, are unaffordable for most national family budgets.
- 3) Foreign demand is also directly and indirectly responsible for the nationwide urban rehabilitation, especially in the centers of Lisbon and Porto. In other words, the rise in house prices is also due to an objective appreciation of the properties' condition, with added benefits for the city’s-built heritage.
As we have seen, the DEMAND for housing in Portugal was catalyzed for several reasons. I would highlight the easier access to credit after the Troika period (as the financial intervention of the International Monetary Fund, the European Commission, and the European Central Bank in Portugal came to be known) and the fact that, at the same time, Portugal was gaining successive and consistent greater media visibility, with a direct impact on the growing number of people who decided to visit and get to know this country every year.
In the next chapter, I will cover one of the hottest topics regarding housing: the GOLDEN VISA.