There's no way I can say there's no property bubble

Between 2015 and 2022, Portugal recorded the fourth highest house price growth in the European Union (94%), twice the level in the euro area (45%), according to data from Sedes.

Home prices in Portugal more than doubled during the period, compared to increases in France (34%), Germany (56%), Sweden (38%) or Italy (7%). By the end of 2022, the level of house prices in Portugal was about 75% above the peak values prior to the 2007/2008 financial crisis.

This description of the housing market was compiled by the Sedes - Association for Economic and Social Development - which presented the report "Housing and Housing Policies in Portugal", led by Carlos Tavares and authored by Carlos Alves, Rui Pedras, Ricardo Arroja and Vitor Mendes.

The possibility of a property bubble

In an interview with ECO, Carlos Tavares, former Minister of Economy in the Duran Barroso government and former chairman of the Securities Commission, warns of the possibility of a property bubble. However, the economist notes that price rises will be "mitigated by interest rates" and to avoid a new financial crisis, "it is desirable that this process proceeds smoothly and gradually".

The Sedes report points to several indicators that prices have risen sharply in recent years and are already well above the European average.

Worry about rising prices

We are the fourth country where price rises have been the most dynamic, they doubled between 2015 and 2022. Price increases are expected to continue in 2023. A lot of people are happy for prices to rise at a slower rate, but if they rise another 10% from the level they already are, that's a lot.

One of the reasons for the 2007/2008 financial crisis was the heating up of the real estate market and high home prices. And in 2022, prices were 75 percent above 2008 levels.

Access to housing

In this aspect, we agree with the government's diagnosis when they proposed the More Housing program, which also identifies rising prices as one of the main reasons for the difficulty of access, which has not been felt as much thanks to the permanent interest rate cuts. But now that interest rates are starting to normalize, it's becoming noticeable.

Predictions for 2023

I believe that rising prices will be mitigated by rising interest rates. When is this going to happen? Within a year? It's hard to predict. A year ago, I made a bet with some friends that prices would start dropping early this year, and I've already lost. Now I've made a new bet for early next year [laughter].

The problem is that the real estate market is very special. On the one hand, it is designed to fulfill a basic need - housing, on the other hand, it is also a market with a big impact on the economy. And in history, all financial crises have started with a real estate bubble.

The risk of a new real estate bubble.

You could say there's no bubble, but I'm having trouble affirming that with rising prices. But there is also no strict scientific definition of a bubble. What is definitely undesirable is a sharp drop in prices.

If nothing is done, we could face a sharp decline, which has been the cause of past financial crises. If there is a financial crisis, people who are already experiencing housing problems will also face problems with income and access to credit. Caution is required here.

The risk to the banks

I think the banks have made precautionary choices to avoid facing this situation. There is a measure that could have been used and was created in 2008 or 2009 but is not currently in use - the residential rental housing investment fund regime, FIIAH, which allowed people who were struggling to make payments to sell their properties and live in them at rent with the option to buy after a few years.

This could be a solution, and it would be a good one. This measure should be renewed because this regime had a tax break that was designated as temporary and ended on December 31, 2020. It surprises me that they don't talk about this solution because it has been a successful experience and we have the legal basis for it. It would make more sense to go down this path than to stick with individual support related to the home loan burden.

The impact of monetary policy

Monetary policy has long had an impact on asset prices, including real estate. The Sedes report analyzed the amount of the monthly payment on a 30-year loan at rates that were in effect from 2014 through 2022, and adjusted for price increases that were nearly 100%, i.e. 94% from 2015 through 2022.

Factually, despite rising prices, the monthly payment has steadily decreased due to the lower mortgage interest rate. This means that people could continue to buy homes at higher prices without spending more resources.

The contribution of short-term rentals to rising prices

There are several factors that have contributed to rising prices, even before short-term rentals came along. Some point to the presence of foreigners with golden visas or digital nomads, for example. In fact, transactions or purchases by non-residents accounted for about 6% of the total number of real estate transactions. In monetary terms, that part was 10% or 11%.

We still have a temporary non-resident regime with tax credits, which give tax relief to people who come to live in Portugal and need accommodation. And many of them have higher incomes, so they can probably afford higher prices.

Short-term rentals have had a not insignificant impact not only on supply, shifting residential rentals toward short-term rentals, but also on prices.

Some municipalities have taken measures to limit new calocations and proposed the use of non-residential space for short-term rentals to shift demand away from the residential market.