In the second quarter of 2022, the Housing Price Index (IPHab) recorded a year-on-year increase of 13.2%, 0.3 percentage points (p.p.) up on the previous quarter. And it was used homes that recorded the most significant price increase, 14.7%. According to surveys, 93% of those who are buying have a tax domicile in Portugal.
The high uncertainty of economic projections, the potential loss of household income due to high inflation and additional increases in interest rates on housing loans could have an effect on the residential market, reducing the demand for houses to buy and, therefore, prices of housing, concludes the Bank of Portugal (BdP) in the November 2022 Financial Stability Report, published this Wednesday. In addition, all these factors will also have an impact on the finances of families, especially the most vulnerable, increasing the risk of bank default, points out the regulator led by Mário Centeno.
The “abrupt” normalization of monetary policy by the European Central Bank, through the increase in key interest rates by 200 basis points until October, together with the high uncertainty of economic projections, brings new risks to Portugal's financial stability. And one of them is even the “risk of price reductions in the residential real estate market”, concludes the BdP in the report released this Wednesday, November 23rd.
Until June, the prices of houses to buy continued to rise, having grown by 13.2% in the second quarter in year-on-year terms. What has fueled the rise in house prices is precisely the imbalance between low supply and high demand, along with rising construction prices. “The housing supply has remained unable to respond to demand”, concludes the Portuguese regulator, explaining that licensing difficulties and disruptions to material supply chains, a lack of labor and rising costs remain. of the materials.
And the restrictions on the housing supply will continue to exist in the future, which means that, in the event of a reduction in demand, “an excess of housing supply that requires a prolonged period for it to be absorbed by the market is not to be expected” , they explain.
Evolution of Real Estate Prices in Portugal
Source: INE
Why can house prices fall in Portugal?
Because this reality is changing, especially with regard to the search for housing to buy, which, on the part of residents, depends a lot on bank financing. “The current uncertainty, the potential loss of real income for families and additional increases in interest rates could reduce the demand for real estate assets”, concludes the BdP, noting that the interest rate reached 2.2% in credit operations housing completed in September.
And there are already signs of some slowdown in the demand for mortgage loans to buy a house in Portugal. The October Bank Lending Survey reveals that, in the third quarter, the demand for loans for house purchase by individuals decreased slightly. And institutions expect a further reduction in demand in the fourth quarter of the year. The BdP pointed out several factors that contributed to this happening:a quebra na confiança dos consumidores;
the prospects for the housing market;
interest rates (to a lesser extent).
It should also be noted that in the last 10 years, the “significant increase” in the participation of non-resident buyers marked the residential real estate market in Portugal, especially by buyers with tax domicile outside the European Union. In the accumulated of the four quarters ended in June, foreign buyers represented 11.7% of the value of housing transactions in Portugal (8.9% in the 4 quarters ended in June 2021), highlights the report. And there are few who resort to housing loans: the granting of home loans to foreign citizens (residents and non-residents) increased between December 2019 and June 2022, from 6.4% to 7%, but continues to have a weight " diminutive”.
Even so, he assumes that, given the framework and vulnerabilities, one of the main risks to the country’s financial stability is “the reduction in prices in the residential real estate market, which could also affect the value of asset portfolios, families or entities financial institutions, either directly or through guarantees in credit operations”, they explain. Another risk pointed out is even the “deterioration of the financial situation of individuals in a context of reduced savings rate, especially among the most vulnerable, and the dominance of indebtedness at variable interest rates”.
Mortgage loans: 11% of contracts will have an effort rate greater than 40% in 2023
Mortgage Loan Amount by Index (new contracts) Mortgage Loan Amount by Index (in stock)
Although the exposure of the banking sector to the purchase of houses with bank financing is, today, lower than in the sovereign debt crisis, the BdP recommends that banks be cautious when granting housing loans, especially with regard to their effort rates.“A desaceleração económica e a subida da inflação, conjugadas com aumentos adicionais das taxas de juro de mercado, poderão deteriorar a situação financeira dos particulares, em especial entre os mais vulneráveis e num contexto de taxa de poupança reduzida, aumentando o seu risco de incumprimento”, analisa o BdP.
And why does this happen? In Portugal, the proportion of variable rate housing loans is around 90%, meaning that the rise in market interest rates translates into an increase in debt service in the short term. It is estimated that in December 2023, 11% of home loan contracts will have a loan service-to-income ratio (LSTI, loan service-to-income) greater than 40% (in June 2022 there were only 5 %).“Adicionalmente, a subida da inflação poderá levar a uma estagnação do rendimento disponível real dos particulares em 2022 e 2023, o que conjugado com maiores encargos com a dívida, pode condicionar o nível de consumo real”, explicam ainda.
However, there are factors that mitigate this risk of default on housing loans in Portugal, points out the BdP:
the reduction of the household indebtedness ratio, in particular for lower income families, to a level below the euro area average. And the concentration of housing loans in families with higher incomes;
the improvement of the risk profile of new borrowers as a result of the macro-prudential Recommendation, which foresees, in the calculation of the stress rate of loans with variable or mixed rates and a maturity of more than 10 years, an increase in the index of 3 p.p.;
the reduction of the maximum maturity of home loan contracts for borrowers aged over 30, leading to a more active restriction of income on the debt capacity;
the shortage of labor in the labor market, which will tend to limit the increase in unemployment if there is a more pronounced slowdown in economic activity;
the accumulation of deposits during the pandemic period, partly explained by credit defaults during the pandemic;
the adoption of government measures to support families, such as the new diploma that designed new rules for renegotiating housing loans.
Source: Idealista