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Aug 05, 2013

Portugal's housing market still weak


 

Portugal’s housing market is still in the doldrums, though recently the situation has improved.  During the latest quarter, property prices in Portugal rose by 0.2% q-o-q (-0.95% in real terms). But of course, this is only one quarter.
For the full year to June 2013, the average property price in Portugal fell by 2.4%% y-o-y to €1,014 per square metre (sq. m.), based on the figures released by Statistics Portugal (INE). When adjusted for inflation, property prices actually fell 3.4% over the same period.

  • The average price of houses dropped by around 4.7% (-5.7% in real terms) y-o-y in June 2013 to €948 per sq. m..
  • Flats fell by only 1.2% (-2.2% in real terms) y-o-y to €1,051 per sq. m..

All regions suffered annual price declines, but the Algarve had the sharpest price decline, with a 5.8% fall y-o-y to €1,256 per sq. m. It was followed by Alentejo, with a 5% price drop to around to €885 per sq. m.

  • During the year to June 2013, property prices in Lisbon Metropolitan Area fell 3.2% from the previous year, to €1197 per sq. m., but were up by 2.5% on the previous month.
  • At the same period, property prices in Porto's Greater Metropolitan Area were down by 2.1% from June 2012 to €944 per sq. m., but rose by 1% m-o-m.

Construction is very weak. In May 2013, the construction sector’s production index was 19.4% down on the previous year, with large falls in construction employment (-15.9%) and wages (-12.1%). The construction industry faces a ‘serious risk of collapse’, warned an official statement from the Association for Construction Businesses, Public Works and Services (AECOPS).

There are no restrictions on foreign property ownership in Portugal and transaction costs are generally low.

House prices way below peak

Property prices in Portugal are still way below their peak. All regions have experienced significant house price falls since late 2007, and despite some recovery in 2009 house price declines started again in the last quarter of 2010.

Q2 2013 was the 11th consecutive quarter of y-o-y house price declines. In Q2 2013, Alentejo was 29.4% down on its peak, and Centro was 25% down.  House prices in AM Lisboa and the Algarve were down by 22.6% and 22.5%, respectively, below the peak level. Norte had the lowest price drop from its peak at 19%.

The most expensive housing in Portugal is in Grande Lisboa, with an average price of € 1,251 per sq. m., and the Algarve with €1,222 per sq. m. In contrast, Alentejo and Centro have the cheapest houses with average prices €873 and €838, respectively.

HOUSE PRICE CHANGE (%)

Average price
Y-o-Y change
Q-o-Q change
From peak
Portugal
998
-4.77
0.23
-19.84
Grande Lisboa
1,251
-5.23
-0.56
-21.27
AM Lisboa
1,170
-5.59
-0.37
-22.65
Norte
882
-3.82
0.30
-18.96
Centro
838
-5.56
0.76
-25.01
Alentejo
873
-7.94
-4.59
-29.37
Algarve
1,222
-8.07
-0.16
-22.49
Source: Instituto Nacional de Estatistica (INE)

The house price boom that swept through most of Europe and the developed world from the mid-1990s to 2006 missed Portugal. Except in 2003, house price growth in Portugal has been generally lacklustre.

  • 2003 - 2004, house prices rose by an average of 6.2% y-o-y (3.3% in real terms);
  • 2005 - 2007, prices rose by an average of 1.25% (-1.3% in real terms);
  • 2008 , prices fell by an average of 4.7% (-7.1% in real terms);
  • 2009, prices fell by an average of 2.6% (-1.8% in real terms);
  • 2010 - 2012, house prices fell by an average of 3.1% (-5.5% in real terms)

Why did Portugal miss the boom? Partly because it experienced sluggish economic growth, with a contraction of 0.8% in 2003, and average of 1.1% GDP growth from 2004 to 2008. In 2009, the economy contracted by 2.9%. Although the economy managed to temporarily recover, growing by 1.9% in 2010, Portugal’s GDP went down again in 2011 (-1.6%) and 2012 (-3.2%).

Moderate to good rental yields

Portugal average price dwellings

Based on  Global Property Guide research of September 2012, the Lisbon region has moderate to good rental yields. Smaller apartment units of around 50 sq. m. are most profitable. They have rental yields of around 6.31%, while larger units, while larger units of 200 sq. m. have lower yields, at 5.29%.

A similar trend is observable for in Lisboa’s villas. Villas of around 150 sq. m. to 350 sq. m. have rental yields ranging from 5.02% to 5.65%, while a 600 sq. m. villa could yield only around 3.54%.

Gross rental yields in the Algarve range from 3.84% to 4.32%. Villas in the Algarve region have even lower yields, ranging from 2.16% to 2.77%.

Mortgage market spooked

The most recent round of interest rate cuts began in November 2011, pushing interest rates back down from the 4% mark reached in the second half of 2011:

  • Interest rates on housing loans dropped again to 3.24% in May 2013, from 3.99% rate in the same period last year, due to the European Central Bank (ECB) successive key rate cuts to 0.5% in May 2013.
  • The mortgage market is extremely sensitive to interest rate changes, since 98% of all loans approved have variable interest rates or initial rate fixation of less than one year.

Portugal mortgage interest

The size of the mortgage market is around now around 66% of GDP, having grown from 41.5% of GDP in 2000. But housing loans fell by 0.5% in 2011, and 3% in 2012, and by 3.7% y-o-y during the year to May 2013. According to the ECB’s July 2013 Bank Lending Survey, the decline has continued over the past three months, but over the next quarter the demand for loans for house purchases is expected to remain unchanged or only slightly decline.

Pent-up rental market demand

There is considerable pent-up demand for rental housing in Portugal.

Lisbon is almost a textbook case on how to destroy a city without bombing it, as tenancy laws have discouraged landlordism by giving tenants controlled rents, and protecting them against eviction.  As a result, young people either live at home, or pay exorbitant key money, or buy an apartment.

Portugal housing loans

Decades of rent control  have encouraged households to move to suburbs or to the countryside, leaving the city centre abandoned and decaying. Rents are rarely sufficient to maintain dwellings in good condition. Most landlords refuse to rent due to “lack of collateral” according to Antonio Frias Marques, president of the National Association of Landlords (NPA).

Despite this there is actually substantial oversupply, with a relatively high degree of second-home ownership (18.4% in 2001) and vacancy (10.6% of housing stock in 2001).

Portugal has one of the highest owner-occupation rates in Europe,  generous government mortgage subsidies having helped push up owner occupation from 52% of all housing in 1981, to 74.9% in 2011. Meanwhile the private rental market has shrunk from 39% of total dwelling stock in 1981, to 18% in 2008. The social rental sector is small, at around 3% of the total housing stock, or 16% of total rental stock.

There are about 720,000 tenants in Portugal, about 10% of the population. Around 300,000 (42%) had contracts after 1990 (i.e., rents are determined by the market), while the remaining 420,000 (58%) had contracts set before 1990, many with rents frozen for decades.

New lease law 31/2012

On August 14, 2012, the Portuguese government approved new legal measure, Law 31/2012, as a structural reform of the current urban lease regime. It is part of the condition for the country’s €78bn bailout agreement from the IMF, ECB and European Commission.

Changes in the law include the following:

  • The new legislation allows parties to agree on any specific period for the duration of the lease, instead of the previous minimum of 5 years. If a period is not defined in the contract, the lease is assumed to be set for two years, which can be renewed automatically.
  • As with the previous law, in case of death of the tenant, the lease will be transferred to the spouse, common law spouse, or relatives, but now only for a period of two years. The tenant’s beneficiaries are not allowed to hold purchased or rented property within the same municipality, or in Lisbon and Oporto’s case in neighbouring municipalities either.
  • There is now a procedure for revising rental values: (1) landlord proposes a new rent to the tenant; (2) the tenant accepts or suggests a counterproposal; (3 if no agreement is reached the agreement may be terminated, and the landlord pays five years’ worth of rent as compensation. Exemption is given to tenants with financial difficulties, who enter a transitional regime with small rent increases for five years. A special transitional regime is also applicable to tenants over 65 years old, or with 60% disability.

The new law also strengthens the landlord's ability to terminate a lease agreement:

  • The landlord has the right to terminate the contract if the tenant failed to pay two consecutive rents and still hasn’t paid the rents due at the end of the third month.
  • If the tenant fails to pay on time (or more than eight days after the due date) for four times in a year, the landlord can terminate the contract.
  • The landlord is allowed to terminate the contract, by notifying the tenant of its intention to terminate the contract with at least two years notice.
  • If the landlord wishes to demolish or undertake works on the property, he may also terminate the lease.

The new legislation also includes a special procedure on evicting tenants who do not vacate the property on the specified date by the court or the contract. It also creates the National Office for the Leases (Balcão Nacional de Arrendamento) where a landlord may apply so as to notify the tenant to vacate the property.

The law aims to update the rents of older contracts, as well as amending the Law 6/2006 or the New Urban Lease Act (Novo Regime de Arrendamento Urbano – “NRAU”) – an attempt to solve old lease issues.

However, abolishing rent control has drawn opposition from tenants. "People are in a terrible state of anxiety," according to Romao Lavadinho, president of the Lisbon Tenants' Association. He estimates that rents could go as high as €1,000 in apartment blocks along Lisbon’s main avenues, up from €200-300 a month, which could greatly affect the middle class.

Landlords felt the new laws were long overdue. According to the President of the Lisbon Property Owners' Association, Luis Menezes Leitao, foreigners find the old law hard to believe, and he recounts that some people in central Lisbon pay rents as low as €5 a month. 

Portugal also recently followed Spain in granting visas from outside the European Union. Portugal will grant a 5-year residency permit to non-EU citizens who buy a minimum of €500,000 worth of property. The permit allows holders to work or study, as well as to travel in Schengen countries. They can opt to apply for permanent residency after five years.

Plunging construction sector

In May 2013, the number of dwelling permits for new family housing construction dropped by 38.1% y-o-y to March 2013, while completed new construction of family housing units also declined by 36.1%.  All regions experienced substantial declines in dwelling permits and completions. Azores (-59.3%), Algarve (-56.1%) and Madeira (-51.7%) experienced the largest falls in the number of dwelling permits for family housing during the year to Q1 2013.

Portugal construction new dwellings
  • The number of for family housing completions fell to 22,996 units in 2012, from a peak of 125,674 units in 2002.
  • The number of new dwelling permits fell to 17,085 in 2011 from an annual average of almost 120,000 units from 1998 to 2001.

Standard and Poor's doesn't approve

Portugal gdp unemployment

Portugal is lumped together with Ireland, Greece and Spain under the derogatory term ‘PIGS’. In Q1 2013, Portugal’s economy contracted by 4% y-o-y, a sharper decline than expected. Portugal has had one of the lowest GDP growth rate in the European Union (EU). In 2012 the economy contracted by 3.2%, after a 1.6% decline in 2011 and a 1.9% growth in 2010. GDP contracted by 2.9% in 2009 and had an average growth of a meagre 1.2% from 2004 to 2008.

The Bank of Portugal predicts only 2% economic contraction in 2013, slightly lower than the 2.3% drop estimated earlier. This new estimate reflects the significant rise in exports. But the bank is still certain that there will be a strong plunge in the domestic demand and projects only 0.3% GDP growth in 2014.

Political uncertainty caused by the back-to-back resignation of Finance Minister Vitor Gaspar on July 1 and Foreign Affairs Minister Paulo Portas has not helped.

Portas resigned as an act of protest against austerity, however, Prime Minister Pedro Passos Coelho interfered in the situation and promoted him to deputy prime minister and also put him in charge of economic policy coordination.

Gaspar, who was responsible for the country’s reforms under its €78bn EU-IMF bailout, was blamed for the austerity measures that made a negative impact on the country’s economy. He was replaced by Treasury Secretary Maria Luis de Albuquerque, which angered Portas since it implied the continuation of austerity policies.

This political turmoil has harmed Portugal's chances of regaining full access to the capital markets on June 2014, as scheduled.  It is likely to end up getting another bailout.  In March 2013, the credit agency Standard & Poor’s had raised Portugal’s credit rating outlook from negative to stable, rewarding it for austerity. However, the recent political instability has prompted S&P to revise Portugal’s sovereign credit outlook back to negative, with a BB long- term sovereign credit rating.  The country’s public debt reached 123.6% of GDP in 2012.

Following a three-year, €78 billion (US$116 billion) bailout received from the European Union (EU) and the International Monetary Fund (IMF) in May 2011, the government adopted economic austerity measures aiming at slashing the budget deficit to 3% of GDP (€5.224 billion) in 2013.

The country’s budget deficit widened to 6.4% of GDP in 2012, higher than the 4.4% of GDP in 2011, according to the INE. The increase was due, in part, to a higher 3.2% slump in activity which weakened government revenues.

This year, Prime Minister Coelho plans to implement a €5.3bn debt reduction measures, mainly driven by taxation, and reach the target without additional tax hikes. In 2013, the government targets a deficit of 5.5%, followed by 4% in 2014 and 2.5% in 2015.

Annual inflation was around 1% in June 2013.

Unemployment was 17.4% in June 2013, down by 0.2 from the previous month, according to Eurostat. It has been the second consecutive month of improvement from the 17.8% peak of April. However Portugal still has the third highest unemployment rate in Europe, following Greece (26.9% - April 2013) and Spain (26.3%).





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