The
overvaluation of house prices is not a new topic in some European countries.
The European Commission had already amended that there are “signs of a
potential overestimation of house prices in some member states of the European
Union”, one of them being Portugal. Now, the European Systemic Risk Committee
(ESRC) has stated that there is a medium risk related to the overvaluation of
house prices in Portugal in the medium term, stressing that the measures
already designed to avoid the problem are “sufficient”.
According
to the ESRC’s assessment, the risk associated with residential real estate
market is high in five European countries (Denmark, Luxembourg, Norway, the
Netherlands and Sweden). Then, there are still 19 countries that presented a
medium risk level – as is the case of Portugal – and other where the risk was
classified as low. As a result of this assessment, alerts were sent to five
countries (Bulgaria, Croatia, Hungary, Liechtenstein and Slovakia) and
recommendations were addressed to two countries (Germany and Austria).
It is not
from now that prices are rising more than recommended by European economic and
financial authorities. Since 2016, prices have increased by more than 6% per year.
On the report about “Vulnerabilities in the Residential Real Estate Sector in the
Eurozone Countries” released in February 2022, the ESRC confirms that in
Portugal house prices “have increased significantly” and are currently
estimated to be “overvalued”.
According
to the ESRC report, although “part of this dynamic can be attributed to the
existence of a prior undervaluation”, the Bank of Portugal suggests that there
was an overestimation of the prices in 2018. The European Central Bank model,
on the other hand, points to a drop in this overstatement at the end of 2020
and early 2021. This is because two important variables were not considered:
the demand by non-residents and the demand for houses for tourism (Local
Accommodation short term rents, for example).
Despite the
pandemic, in 2020 and in the first half of 2021, house prices increased and
presented levels considered high according to the ESRC criteria. This is
because the average price rise was 8.6% in 2020, a value just 0.7% lower than in
2019 (9.3%) at a time when the number of home sales was already at pre-pandemic
levels.
The ESRC’s
conclusion on the medium-term risks and vulnerabilities in the Portuguese
residential real estate market is clear: the country is at “medium risk” and
the macroprudential policy implemented by the Bank of Portugal was considered
“adequate and sufficient to mitigate the identified risks”.
Although
the risk is considered medium, the ESRC identified three threats in the
residential market that must be carefully watched:
-
The
high rise of house prices
-
High
indebtedness of households – rising again namely due to housing loans. Loans
with variable rates continue to represent a high percentage of contracts and
are a “source of risk” according to the European Central Bank
-
“Signs
of relaxation” in interest rate spreads
According
to the committee, home loans in Portugal make up one of the largest portfolios
among European banks, with 38% of the total in the first quarter of last year.
But, since 2018, there have been measures to reduce the amount of new home
loans. One of them was to create limits on the ratio between the amount of
financing in relation to the value of the property that serves as collateral; another
went through applying maximum effort rate; and limits on contract terms. It
should be remembered that this year – as of April 1, 2022 – a new measure by
the Bank of Portugal will come into force that will limit the maximum payment
terms of mortgages for those over 30 years old.
These are
the measures that the European Central Bank considers “sufficient”, at least
for now, because if the economic scenario worsens more than expected, the Bank
of Portugal may have to further strengthen measures on mortgages.
It is important
to remember that if the real estate market is considered too expensive for the living
standards of the Portuguese, the rental market is even more unsustainable. So
purchasing property is always the best option for those who are able to do so.
Edson Lázaro
Mais Consultores
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