Housing marketHouse pricesEconomyCreditCoronavirus

Why is it that when we are told we can leave our house again... it should be worth less than it was when we were told we had to stay there?

José Cabral

This article is not about how much house prices in Portugal could go down. It is about remembering that, while everything changes so suddenly all over the world, one cannot pretend that everything will remain the same in the national real estate market.

Perhaps it is important to remember that, after some time digesting news that came from the Far East, the last two months brought countless events (in closer places, both geographically and culturally) that, in normal times, would have led us to absolute bewilderment.

 

Italy isolated 16 million inhabitants from the rest of the country, spread across 11 provinces in 4 regions. In the Spanish capital, the health system collapsed and there was no newscast that wouldn’t give us a desperate testimony, often in tears, from a health professional in the metropolitan areas of Madrid or Milan. At a greater distance (but in the most popular of all Western scenarios) it is still difficult to conceive that, in the heart of New York, there are mass burials in mass graves. And do you still remember Adriano Maranhão? Let me help you... The first infected Portuguese citizen, crew member of a cruise ship docked in Japan. Do you know why you didn't remember? Because that event – which opened the news in the afternoon and at night only two months ago – is perfectly irrelevant to the present day. As we are resigned to listening, at lunchtime, to daily reports of dozens of deaths. Or to hearing the Minister of Finance and President of the Eurogroup say that “none of this can be compared to anything, not even close to whatever we have experienced”.

 

Why? Where do you want me to start? By the return to the control of land borders with Spain? By the suspension of flights to and from outside the European Union? By the shutting down of schools? By having eradicated from our daily routines gestures as common as kissing faces and shaking hands? By lining up at supermarkets and pharmacies and staying home for a record number of days? By the most fashionable accessory of the season, surgical masks? By the police at the entrance of 25 de Abril Bridge deciding who can or cannot pass to the other side of the Tagus? By everything all of us already know. All of us, of course, except a few mediators, promoters and real estate media for which, apparently, a nice Forbes article – in which a North American publisher highlights the Algarve coast as the best of three options to live after this pandemic crisis – will save the national real estate from any relevant impact that this whole brave new world of unimaginable events could cause.

Milan skyline seen from the top of the Duomo. The city and the whole of Lombardy were isolated from the rest of the country

by Scaliger

Let's look at some government measures that are expected to mitigate any difficulties in the relationship that each of us has with our housing costs:

  • protection of jobs through the layoff mechanism ensuring that, until 60 days after the end of this regime, all workers concerned cannot be dismissed;
  • a moratorium on financial plans that, in the case of private individuals, applies to credits for the acquisition of permanent residence (banks are prevented from revoking them during the designated period);
  • financial support to tenants who, during this period, cannot have their contracts cancelled due to non-compliance.

Layoff

Layoff means that the worker will receive 2/3 of his gross salary, 70% of which is supported by the Social Security system. In this way, the State protects, in the short term, an incalculable number of jobs. But not everything is incalculable. On April 15, 938,000 workers were covered by this regime. And on April 6, more than 102,000 self-employed workers had already applied for the Extraordinary Support to help economic activity. Being that, between 16 March and 13 April, more than 52,000 requests for access to unemployment benefits were submitted (of which more than 24,000 have already been deferred). In other words, and without prejudice that these numbers might continue to increase: about 1/5 of the national active population has seen their income drastically reduced. It remains to be seen how challenging it will be to get a new job in the coming months or keep the current one.

Moratorium of credit

The moratorium on housing credit (permanent residence) enables those whose situation has been affected by the pandemic to suspend the payment of their liabilities until 30 September of the current year. But you know what? Some banks have created even more comprehensive moratoriums (credit for secondary housing, consumer credit...) and now suggest deadlines superior to 6 months. And why should banks give priority to postponing the repayment of the capital they lent and the payment of interest due? Because they are afraid. Afraid that the money that is expected to enter their safes (but that they now fear may not arrive on time) will be classified as default. Something that would significantly affect their financial ratios and, therefore, their ability to finance themselves. And believe me, none of us want that to happen (a further tightening of credit could be the catalyst for a great recession). Because in a country where credit for the purchase of a house has regained importance – in 2019 there was more new house financing granted than in the years 2012, 2013, 2014 and 2015 altogether – one of the worst social and economic scenarios for the country (and for house prices) would be the skyrocketing of non-compliance regarding mortgage loans.

Support to tenants (and landlords)

The Government forbid the cancellation of lease contracts deriving from the lack of payment of rents during the state of emergency (providing a period of 12 months for the payment of rents due) and allowed, in cases where tenants see their income affected by the expected situations, the access to an interest-free loan from the Housing and Urban Rehabilitation Institute (IHRU). On the other hand, if the tenants do not resort to the existing support and the losses of the owners fall under the terms foreseen in the law, the Government allowed the landlords to also benefit from the interest-free loan from IHRU. By April 23, this institute had received 873 requests from tenants and 4 from landlords. Being that – in order to realize the impact that these figures may (or may not) represent – in the year 2019 alone, more than 140,000 new lease agreements in Portugal were communicated to the Tax Authority.

Madrid skyline. Perhaps the most affected of European capitals.

by Fresnel

Practical consequences?

Now imagine yourself as a tenant struggling with difficulties to pay the rent. With the perception that, in the coming months, you won’t be able to generate the income you relied upon when you signed the lease. Would you ask the landlord to review the terms of the agreement?

 

Now imagine yourself in the role of the owner. Bearing in mind that, at the time of your conversation, the following sentence was published in Diário da República: “Failure to pay rents due in the months in which the state of emergency prevails and in the first subsequent month, under the terms of the previous article, cannot be invoked as a basis for resolution, denunciation or other forms of termination of contracts, nor as grounds for the obligation to vacate buildings". Would you remain adamant?

 

And even if the tenant leaves of his own free will... Do you think that – with a partially paralyzed economy, a fifth of the national working population seeing their income affected and another two or three accounting for what might happen to them this year – you will be able to rent your property at the same rates as 3 or 6 months ago, without risking extending the vacancy period (that is, losing money)? Ultimately, the value of a house is defined by the value of the rental income it is capable of generating. If the amount for which a house is rented goes down (or is rejected by demand), its’ potential market value is expected to go down as well. Although, it is important to note, in a smaller proportion than the value of rents.

Nowadays there is a lot of speculation about the mandatory use of masks in closed public spaces.

by Paranyu

What now?

Obviously it is very positive to have a text in Forbes suggesting Algarve as the ideal place for a change. Or that Der Spiegel or the New York Times published articles in which the national response to COVID-19 is highlighted, compared to neighboring Spain. All of these articles contribute to an impact on the perception of the country and reinforce Portugal as a stable and safe destination. And yes, they can contribute to the promotion of tourism or attract foreign investment. But it does not seem honest to suggest that these moments of national exaltation work as counterweights to the suffering and paralysis that the new coronavirus (and everything that it forced us to stop doing), imply for the Economy.

 

It is difficult to predict what will happen in the near future. In Portugal. Or in Spain (which is where 25% of our exports go). Or in any other place. There is no memory of such a suspension of world mobility and paralysis of economic activity. We only know that there are a number of people (including myself) who do not know what will happen to their income. Because few companies are expected to make more business in 2020 than in 2019. And it's not just the car shops or hairdressers. Or gyms (I think I'll worry less about my tummy this summer). Or real estate brokerage companies. Or cafes and restaurants. Or almost all retailers. Or event organizers (what will the Websummit be like this year?). Or cinemas and theaters. Or actors, singers and producers. Or dentists. Or drug dealers (who also rent and buy houses...). Or hotel staff. Or taxi drivers. Or "ubers". Or tuk tuk drivers. Or tourist guides. Or commercial aviation crews.

 

And speaking of aviation, are we going to want to travel again this summer? It will not be expected that, when air traffic is normalized, we will have multitudes of Spanish, French, Italian or English citizens, packed and prepared to enter the country. And if they wanted to, would they accept to do it in a full cabin? Social distance in commercial aviation does not seem to be compatible with low fares (the same ones that have highly contributed to the growth of tourism worldwide). And yes, it is at this moment that the international press (depending on how our performance is perceived) can help restore confidence in visiting Portugal, without increasing risks of contagion. Because the struggle to get out of this new crisis will not be easy without being able to count on the full contribution of an industry that, in 2019, guaranteed 19.7% of total exports and 6.9% of national employment. And that helped to leverage other sectors... like real estate. According to a British consultant, in Europe, only in Italy and Spain will tourism be more affected than in Portugal.

 

Let’s not be naive: no matter how hard it is for the Prime Minister to admit, and however hopeful we may still be about a European response, the day will come when we will all be called upon to pay (part of) the price of everything that is happening. Even company financing, which may help save our jobs, is guaranteed by the State to 90% (micro and small companies) and 80% (remaining). And as we all very well learned from the last crisis (and to Louis XIV's dismay): the State is us. Having said all of this, there is one conclusion: many families will face real losses in their income. 

 

The good news? The International Monetary Fund (IMF) predicts - assuming that the effects of the pandemic will fade in the next semester and that activity will tend to normalize - growth for the world economy in 2021. The thing is that the IMF will know little more than any of us about the production of a vaccine or a second or third pandemic wave. And that uncertainty will continue to be, almost as much for the Economy as for Public Health, the greatest of all challenges The real estate market can always surprise us (few would risk saying that, in Lisbon, December 2019, prices per sq. meter would be higher than in January of the same year), but to suggest that this whole context will not have an impact on house prices is to turn a wishful thinking into a lie.

 

I leave you with a suggestion. Think twice before accepting advice from someone who, when talking about rising property prices, uses the verb “to rise”, but when referring to a fall in values, insists on conjugating the verb “to adjust”. It is very likely that the priority of that specialist is not to transmit factual and independent information. Or that he is not an expert on anything.

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