Portugal's housing market is improving
May 19, 2014
After more than three years of house price falls, Portugal’s housing market is now recovering, amidst a struggling economy. Property prices in Portugal increased by 1.22% (1.6% in real terms) during the year to the first quarter of 2014, to an average of €993 per square meter (sq. m.), the first year-on-year price increase since Q3 2010, based on the figures released by Statistics Portugal (INE).
However, numerous cities and municipalities have experienced strong house price growth while others are struggling.
Marinha Grande saw the biggest annual house price increase of 24.3% during the year to Q1 2014, followed by Figueira da Foz (15.9%), Tomar (15.6%). Other municipalities which registered double-digit annual house price increases included Bragança (14.2%), Penafiel (12.6%), Portimão (10.9%), Aveiro (10.7%), and Beja (10%). Other municipalities with strong house price increases included Covilhã (9.2%), Castelo Branco (7.3%), Portalegre (7.2%), and Guimarães (5.8%).
On the other hand, Abrantes recorded the biggest annual house price fall in Q1 2014 of 19.9%. Other municipalities which were still struggling included Viseu, with house prices falling by 8% y-o-y in Q1 2014, Vila Nova de Famalicão (-5.4%), Paredes (-5.1%), Olhão (-3.7%), Santarém (-3.3%), Barcelos (-3.2%). Municipalities with minimal house price falls included Caldas da Rainha (-2.7%), Oliveira de Azeméis (-2.5%), Faro (-1.5%), Santa Maria da Feira (-0.4%), and Leiria (-0.2%).
By region and in a quarterly basis:
- In Lisbon metropolitan area, property prices dropped by 3.2% (-2.9% in real terms) q-o-q in Q1 2014, to an average of €1,180 per sq. m.
- In Porto metropolitan area, property prices fell by 1% (-0.7% in real terms) q-o-q in Q1 2014, to an average of €927 per sq. m.
Residential construction has not recovered yet. Licensed dwelling numbers fell 2.4% to 565 during the year to March 2014, according to Statistics Portugal. Likewise, completed dwelling numbers plunged 30% y-o-y to 14,151 units, during the first three quarters of 2013.
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 (%)
|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
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.
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.
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.
- 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.
Portugal emerges from recession
For the full year of 2013, the Portuguese economy contracted by 1.4%. However in the second quarter of 2013, the country emerged from its prolonged recession, with quarterly GDP growth of 1.1%, the strongest in the European Union. The economy is expected to grow by 1.2% this year and another 1.5% in 2015, according to the Bank of Portugal.
Last year, Prime Minister Coelho started to implement €5.3bn debt reduction measures, in a plan that will not require additional tax hikes. As a result, the country’s budget deficit narrowed to 5% of GDP in 2013, well below its 5.5% target. The country aims for a budget deficit of 4% of GDP this year and 2.5% of GDP in 2015.
“Economic activity in 2013 was characterized by a recovery in domestic demand since the second quarter, stemming in particular from private consumption and private investment, alongside with the maintenance of a robust growth in exports, clearly outweighing that of the external demand targeted to the Portuguese economy,” said the Bank of Portugal.
Portugal’s current account has improved dramatically from a deficit of 10.6% of GDP in 2010, to a surplus of 0.5% of GDP in 2013.
The Portuguese government hopes to regain full access to the capital markets in June 2014. In April 11, 2014, Fitch Ratings upgraded its outlook for Portugal to positive, while maintaining the country’s ratings at BB+.
This good news comes after a series of dismal years. Portugal’s economy contracted by 3.2% in 2012, and by another 1.3% in 2011, according to the IMF. In 2010, the economy had 1.9% growth, but in 2009 GDP contracted by 2.9%, after average annual growth of only 1.2% between 2004 and 2008.
Portugal continues to be adversely affected by the global crisis. It was the third European Union (EU) country to ask for an emergency bailout in 2011, after Greece and Ireland. Following a three-year, €78 billion (US$116 billion) bailout from the EU and the International Monetary Fund (IMF) in May 2011, the government adopted economic austerity measures.
Unemployment remains high. In March 2014, unemployment stood at 15.2%, down from 17.4% in the same period last year, according to Eurostat.
Inflation slowed to 0.4% in 2013, down from 2.8% in 2012, 3.6% in 2011, according to the IMF.
The country’s public debt is expected to continue rising at least until next year, when it is projected to reach 131.8% of GDP, according to the Organization for Economic Co-operation and Development (OECD). Portugal’s public debt was equivalent to 130% of GDP last year, up from 123.6% of GDP in 2012. Private sector indebtedness was also high, exceeding 250% of GDP last year.
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