Portugal’s housing market hits new low

House prices in Portugal fell 4.8% during the year to September 2008, according to the Instituto Nacional de Estatistica (INE), after moderate increases from 2002 to 2005, and the stagnation 2006-2007. When adjusted for inflation, house prices actually dropped 7.7% during the year to September.

The average price was €1,164 per sq. m in September, down by 6.5% from the peak of €1,245 per sq. m. in Q4 2006.

The house price boom that swept through most of Europe and the developed world from 1995 to 2006 missed Portugal. From 2001 to 2006, average property prices rose 100% in Spain, compared to a mere 17% in Portugal.

• In 2006 Portugal’s house prices rose 0.65% (a fall of 1.8% in real terms).
• In 2007, Portugal’s house prices fell 1.2% (a fall of 3.7% in real terms).
• The prices of dwellings rose modestly by 16.4% (8.2% in real terms) from 2002 to 2005.

Why did Portugal miss the boom? Partly because it experienced sluggish GDP growth of just 1.1% annually between 2001 and 2007, with 0.5% growth in 2008. In 2009, the economy is expected to contract 0.8%.

Another reason for low hour price growth in Portugal has been housing oversupply. Dwellings per 1,000 inhabitants rose from 349 in 1980, to 482 in 2000, among the highest in Europe, encouraged by low interest rates.

The total housing stock increased 28% from 1981 to 2001, while population only rose 4.4%. Almost 45% of Portugal’s present housing stock was built between 1981 and 1990.

With the economy hurtling into recession, the Portuguese housing market is expected to continue its downward price spiral until end-2010. Construction activity is also expected to slow significantly. Unemployment is estimated to rise to 8.5% in 2009, from 7.6% in 2008.

No lucky regions now

All Portugal’s regions have experienced significant house price falls since early 2008. Of the five regions, Alentejo and Centro registered the highest house price declines (-8.5% and -7%, respectively) in September 2008 from a year earlier.

In Lisbon’s metropolitan areas, average house price dropped 5.7%, a worse performance than in the three previous years (a decline of 3.9% in 2007, after a 1.3% rise in 2006 and 1% rise in 2005).

In the Algarve, Portugal’s favorite top-end tourist destination, house prices dropped 4.4% during the year to September 2008, following a mere 0.13% price increase in 2007. The Algarve was previously Portugal’s most resilient housing market, with property prices rising 6% in 2006, while house prices in other regions stagnated or even fell in 2006.

The Algarve has the most expensive housing in Portugal, with an average residential dwelling price of €1,473 per sq. m. Metro Lisbon ranked second with an average price of €1,380 per sq. m. On the other hand, Centro has the cheapest properties, at €986 per sq. m.

Houses have fallen in value more than flats. During the year to September 2008, house prices dropped 9.6% from a year earlier, while apartment prices fell 5.2% over the same period. From 2002 to 2007, house prices rose 25.3%, while flat prices rose just 11.1%.

Crisis pushing up mortgage rates

The turmoil gripping the international financial markets has not spared Portugal:

• Interest rates on mortgages with ‘floating to 1-year initial fixation’ rose to 5.6% in November 2008, from 5.2% a year earlier, even though the European Central Bank (ECB) slashed the repo rate to a record low of 2% in January 2009, from 4.25% in September 2008.
• For 5-10 year fixed-rate mortgages, interest rates rose to 6%, up from 5.4% from the previous year.

Mortgage volumes slowing

Portugal’s mortgage market expanded from 36.9% of GDP in 1999, to 62.1% of GDP in 2007, according to the European Mortgage Federation (EMF).

However the Portuguese mortgage market slowed tremendously in 2008.

Household debt for house purchases rose just 4.7% in the year to November 2008, far below the average growth rate of 19.3% annually from 1996 to 2006, according to the Bank of Portugal.

Construction and housing supply falling

Residential construction, which accounts for the largest share (about 38%) of total construction activity, has been declining since 2002.

• The number of dwellings completed for family housing declined 52.2%, to only 60,000 units in 2007, from a peak of 125,000 units in 2002.
• New dwelling permits halved from 1999 levels.
• New apartment building permits fell 61% from 1999 levels.

Stagnant rental market

There is considerable pent-up demand for rental housing in Portugal, despite the oversupply of houses. Tenancy laws, which have long given tenants controlled rents and protected them against eviction, have discouraged landlordism.

Generous government mortgage subsidies have pushed owner-occupancy rates up, from 52% in 1981, to 75% in 2001, giving Portugal one of the highest owner-occupation rates in Europe. In 2006, the rate of homeownership again rose slightly, to 76%. As a result, young people have long had to either live at home, or pay exorbitant key money, or buy an apartment.

The handicapped private rental market has shrunk from 39% of total dwelling stock in 1981, to 21% in 2001, while the social rental sector has stagnated at 3% to 4%. In 2007, there were about 160,000 social rented units out of 5.6 million total housing units in Portugal.

Despite government attempts to stimulate the rental market, it remains sluggish. Rents are increasingly insufficient to maintain dwellings in good condition.

Rent reforms too tame

In June 2006, the New Urban Lease Act (Novo Regime de Arrendamento Urbano – “NRAU”) was passed in an effort to revive the decaying rental market. NRAU gives more security to landlords. The new law was enormously controversial and was at the centre of passionate public debate. For new contracts under the NRAU:

• Rents can be freely agreed.
• The minimum term for fixed-term residential tenancies is 5 years.
• There are automatic and consecutive extensions of three years, but the landlord may prevent renewal, by giving notice 1 year ahead.
• Where there is a termination agreement, judicial proceedings are not necessary.

For rental contracts already in force, an increase on rental income is based on the following:

• Conservation rating
• Property assessment, conducted by the government every less than 3 years.

The rental building’s final rating should be satisfactory for the landlord to be allowed (by law) to increase rents; otherwise the tenant can require the landlord to renovate the property. If he refuses, the tenant is entitled to buy the property for the value attributed to it under the terms of the Property Council Tax, known as the Imposto Municipal Imobiliário (IMI).

While NRAU will allow property markets to work more effectively, it is quite unfair to landlords with existing rental contracts (see readers’ comments on Portugal landlord and tenant pages).

In addition to NRAU, several other housing laws have been passed. PROHABITA, a housing and rental support program, was modified in March 2007. The amendments include the promotion of area rehabilitation instead of construction of new housing units and the implementation of sustainable housing solutions for low-income families.

Then in June 2007, the Initiative PORTA 65 was approved. The program aims to promote a more dynamic rental market—social and private.

Finally in May 2008, the Strategic Housing Plan was introduced. The new program heavily promotes renting and renovation of existing homes, to the detriment of new housing construction. Moreover, it also suggests that properties acquired by the government should be rented out to low-income households, thus stimulating the rental market.

However, the implementation of these new housing laws still faces hurdles. Obtaining a property rental license is “complex, costly and time consuming,” reports the Portugal Resident, with a license costing €1,200 or more and taking several months. In addition, the law still gives the tenant far too much security.

Now for the economic boost

The government unveiled its first economic stimulus package worth €2.2 billion in December 2008, in a bid to limit the effect of the global economic turmoil. The package, which is equivalent to about 1.25% of GDP, will be used on the following:

• €800 million in extending credit lines to support exporters
• €500 million in modernizing schools
• €250 million for energy infrastructure
• €580 million for employment programs

"Just by itself, this growth initiative may have a 0.7 percentage point effect. It is a significant impact in the current situation," said Finance Minister Fernando Teixeira.

In addition, the government recently decided to speed up the construction of public highways, resulting in a €1.7 billion private construction spending.

"Alongside the stimulus plan, we have decided to accelerate the implementation of measures which were already underway and which have an impact on public investment," said Paulo Campos, state secretary for public works. "This is a significant package which we have been trying to bring forward, so it can also have an effect in combating the crisis," he added.