Real estate prices in Portugal expected to decrease by4.4% by2023, according to S&P

In2022, the world was surprised by the increase in interest rates by leading central banks in an attempt to reduce inflation. This is where the cycle of raising interest rates on mortgage loans began. This situation reduces demand for purchasing homes and is already leading to a decrease in housing prices in several countries, a trend that will intensify this year.

S&P Global Ratings predicts that Portugal will be one of the European countries experiencing the most significant drop in house prices this year (-4.4%), followed by the UK (-3.5%). The current situation is impacting all economies and real estate markets, but not equally. "The impact of higher interest rates on housing prices and investments may also vary from country to country, reflecting differences in the real estate markets of Europe, including financing methods," S&P explains in a document published on Wednesday, January11.

This is because countries with higher percentage loans will suffer more from the increase in interest rates. "Price adjustments in housing will be more serious and rapid in those countries where the variable interest rate is high and the increase in interest rates is greater," the rating agency emphasizes. This situation makes Sweden and Portugal more vulnerable to rapid housing price corrections compared to other markets considered.

Reminder that in our country, around90% of mortgage loans have a variable interest rate linked to the Euribor rate. S&P forecasts indicate a decrease in housing prices this year in10 out of11 analyzed European economies. Specifically, in Portugal, the decrease in housing prices will be most noticeable in2023 (-4.4%). This is followed by the UK, where housing prices for purchases are expected to decrease by3.5% by the end of this year. Spain and the Netherlands are also expected to experience a decrease in nominal housing prices (both -2.5%). In Sweden, housing prices have already started to decline in2022 (-4.3%), unlike other economies under consideration, such as Portugal, where housing prices increased by6.8% last year, as forecasted by S&P. But this year, the decrease is expected to be softened in this country located in northern Europe (-2.2%). In2023, only Switzerland is expected to see a slowdown in the growth of housing prices offered for sale (+0.5%), rather than a decline.

Will housing prices in Europe rise again in2024? Therefore, S&P predicts that most of Europe will experience a housing price correction in2023. And in some European economies, the decline in housing costs will continue into2024, for example, in Germany (-1%), Spain (-1%), and Belgium (-0.5%).

"We note that the adjustment to higher interest rates may continue for up to ten quarters and is usually twice as strong after a period of low interest rates," explained Sylvain Broyer, Chief Economist for Europe, Middle East, and Africa (EMEA) at S&P Global Ratings, as cited in the document. Although historically, housing prices in Europe have been fairly resilient to declines."

It should be noted that while nominal interest rates on mortgage loans have risen rapidly and reached their highest level in the last decade, in real terms (adjusted for inflation) interest rates remain negative and are expected to stay that way until mid-2024.

The rise in interest rates has not yet reflected in housing prices in 2022. In its analysis, S&P emphasizes that both housing prices and investments may be affected by the rapid increase in mortgage interest rates, but notes that not all residential real estate markets adjust housing prices simultaneously. Euribor interest rates rose in Europe throughout 2022. However, the agency points out that housing prices have barely adapted to the higher interest rates. Why? A lack of supply for the existing demand for housing may be the reason for this fact. Up until this semester of 2022, families continued to buy homes in many countries (for example, Portugal), even with higher interest rates. This is why housing prices continued to rise in the analyzed countries in 2022. Specifically, S&P states that housing prices continued to grow on average by 10% until the first half of 2022. There are also factors that support further demand for home purchases in Europe: improved financial conditions for families, supported by high employment levels; rising wages; and accumulated savings during the pandemic. Thus, the agency notes that families' purchasing power may recover as early as the beginning of 2024 due to rising wages. Additionally, it also points out that the influx of refugees from Ukraine is also increasing the demand for housing.