05 July 2020
The second half of a year has begun, the first six months of which will remain in the history books. So let's talk about numbers (and the precautions we must take when interpreting them), myths, and other things that have nothing to do with real estate but that greatly affect its evolution.
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In order to try to understand what may happen to real estate in Portugal, it is convenient, first of all, to understand what happened before. And what happened in 2019 was this: the number of transactions in Portugal rose 1.6% compared to 2018 (which, in turn, had grown 16.6% compared to 2017). More detail? In the Lisbon Metropolitan Area, it grew by 0.07% and in the Porto Metropolitan Area, it decreased by 3.6% (almost the same as in the Algarve). Conclusion? Apparent stagnation in a historically high number of transactions. And while it is true that this year, in January and February, there were more purchases and sales than in the same months of 2019, in March and April they decreased by 14.1% and 17% respectively. But doesn't it seem strange that in state of emergency (lockdown from March 19 to May 2), so many people continued to see, negotiate and buy houses?
The vast majority of real estate transactions in Portugal are preceded by promissory contracts. And what is the best way to make someone believe in a promise? Paying for it. That is to say, the vast majority of these deals were researched, negotiated and, most importantly, signalized up to 30, 60, or 90 days before the transaction. Conclusion: the bulk of purchase and sale contracts signed in April and in the second half of March were partially paid before the perception of uncertainty generated by the pandemic (not completing a previously signed transaction would mean losing, in most cases, between 10% to 20% of the total purchase price). This means that the containment period will have severely penalized the number of real estate transactions in May or June (the results of which are not yet known). And it will probably be the semester that is now starting that will give us stronger clues as to how the market evolves in the post-confinement period.
What about prices? I suggest caution whenever you are tempted to extrapolate published information about the evolution of property prices in general, to the perception of the value of the house you have in mind. But it is important to gain sensitivity to the numbers. Do you have any idea how much the houses and Portugal have appreciated, according to the National Statistics Institute, between the first quarter of 2016 and the fourth quarter of 2019? 30%. And in the center of Lisbon? 73.2%. And in Porto? 68.8%. Did you know that until the 2nd quarter of 2017, the median values / m2 of houses in Coimbra and Porto were practically the same, but that, in the last quarter of last year, the values in Porto were 40% above those practiced in Coimbra? And do you have any clue as to what happened to cause such a dramatic change in just two years? Or did you suspect that, for example – in Lisbon – between the first and fourth quarter of 2019, the median value / m2 of houses in the parish of Parque das Nações rose 24.8% while, in the same period, it fell 3.3% and 5.4% in the parishes of Campolide and Carnide? I'm not trying to confuse you. Just reminding you that there are numbers you read in the media that, being trustworthy, may not reflect the reality of the house you want to sell or buy. Read, research and talk to anyone you believe may help you.
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But make sure to choose well the people you talk to. Working in commercial areas is demanding and not everyone can avoid the confusion between reality and the speech that is most convenient to them.
Wishful thinking #1: “prices cannot go down because demand continues to exceed supply”. Unlike supply (which even during the state of emergency did not fall), demand is very difficult to measure. For example: although it is an interesting indicator, we cannot say that a greater number of accesses to the real estate portals Idealista or Imovirtual will guarantee a greater number of offers for the purchase of real estate. Or assume that the social upheaval we witnessed on the news, implies that half of Hong Kong's inhabitants will buy a house in Portugal to secure a European visa.
Wishful thinking # 2: “developers are in no hurry to sell because their financial situation is solid and, as such, the values of new construction will not go down”. What some seem to forget is that, unlike a private individual who sells the house where he lives (purchased for the same purpose and who, unless there is a greater need, can always choose to stay there), the sale is, for a developer, the only reason which justifies the whole sense of purpose of his activity. When you hear a salesperson saying these types of things ask him if, being apparently in no hurry, he has prospects of being paid in the near future. Because nowadays this indicator is as or even more relevant to the real estate market than the liquidity of companies in the sector: what will happen to the income of those who live and work in Portugal? And what are people going to do with it?
Income in Portugal
It is estimated that more than 800 thousand workers have been put on lay-off. Not forgetting that 138 thousand requests for support by independent workers were registered. And that forecasts point to about 500 thousand unemployed by the end of the year. Without risking mixing those who are currently on lay-off with those who may be unemployed tomorrow, we are talking about almost a million and a half whose income in 2020 will have declined (according to these calculations, a third of them will live on a state subsidy and not a salary), in a country where the active population does not reach 5.3 million people.
If we have less money we spend less. And if we have less because there is a pandemic about which so little is known, uncertainty skyrockets. And what does uncertainty do? It makes us risk (consume) less. With the economy suffering, a possible fall in house prices in Portugal, without prejudice to a presumed future recovery in more prosperous times (whenever they arrive), should not be read strictly as bad news. What I mean is that many Portuguese citizens would suffer if, with almost ¼ of the families risking losing income, the costs of the expenditure that represents the largest share of the family budget continue to skyrocket. Portuguese and foreigners. Because, ultimately, the social balance that exists in a given square meter is essential for the definition of its value. But before speculating about a negative price variation, if you need credit to buy the house of your dreams, remember that the same reasons that could lead to a drop in property prices will also have an impact on the capacity of banks to finance the economy. Waiting for a price drop may mean waiting for the day when banks will no longer lend you the money you need. And if they continue to do so now, much is due to the moratoriums (mortgage payment holidays), which don’t just push a problem forward, but dilute it over a period of 12 months, problems that would have been difficult to manage in half a dozen weeks.
The truly differentiating factors regarding foreign investment
There is one thing that has escaped most analysis and reviews: essentially, Portugal does not attract foreign investment because there are programs such as the Golden Visa or Non-Habitual Resident, without prejudice to the merit of these initiatives. Particularly because it is not the only European country with programs of this nature. Portugal attracts investment because it has become a strong brand. And this took time. Expo 98, José Saramago's Nobel Prize for Literature in the same year, Luís Figo's dribbles, Euro 2004, the special one, José Manuel Barroso's stay in Brussels, Ronaldo, Ronaldo and Ronaldo. Siza Vieira, Souto Moura and other architects, artists such as Joana Vasconcelos and Vhils, the textile sector, the footwear industry or the title of European football champion.
There are an endless amount of people who are the cause and consequence of a change in perception of the country displayed on their passport. The number of times these people and moments put Portugal on the map and in the world news matters a great deal. And yes, if you have a house in Portugal it is worth a few euros more because of Cristiano Ronaldo. Even if people who choose to visit or live in this country are not aware of how much he may have contributed to getting them here.
You may not have this perception, but – as a Portuguese citizen – it is very clear to me that just 20 years ago there were a lot of people in this world who wondered if our official language was Spanish or for whom it was not clear that we are one of the oldest sovereign states of the world. In recent years, traveling has meant hearing people from the most diverse countries fondly remember the days, weeks or months they spent in Portugal. 10 years ago Lisbon was the only national place to be recognized as a brand with added value. Today there are people in London or Paris discussing whether to spend a week in Peniche or buy a house in Óbidos (cities that most Portuguese people have never visited). But for these conclusions, as relevant as the country product is, it also matters what your brand represents. In other words, the perception of others (because Portugal was already a captivating country before the international press realized this). The world knows increasingly more about these 92 thousand square kilometers of land and there is no reason not to continue to want to know more as long as the country shows that it controls the pandemic. And that is definitely a long term run...