It is that time of the year
again when we reflect on the past year and provide an outlook for the property
market in the year ahead, 2022. Its been a remarkable time which has seen property
prices rise again. We are now almost two years into the pandemic with a new
wave, the 4th taking place with an alarming increase of Covid-19
infections in various Northern European countries. A new corona variant called
Omicron in South Africa is reason for caution as it spreads faster and is
potentially more dangerous. Lockdowns are again looking to be part of the
solution to stop the spreading of the virus which potentially can slow down the
economic recovery. However, the property market in Portugal never looked back
and continued to rise, despite the pandemic, or better, because of the pandemic
and the unprecedented financial support and
negative interest rates to deal
with the deepest recession since World War II. In addition the Portuguese government
offered financial support and tax holidays for businesses and individuals alike
and banks put a moratorium in mortgage repayments for those who needed it.
The extraordinary
measures have led to increasing debt to GDP levels, which in some southern
European countries were already very high and well above the 60% threshold
agreed in the Maastricht treaty 28 years ago. Countries with low debt levels
are financially in a better position to support their economy from the Covid-19
fall out (Portugal 137.2%, Italy 160%, France 118%, Germany 71.1%, Holland
54.9%, Greece 209.3%, and Belgium 118.6%). Due to pressure from France even Germany is
changing their stance on the 60% rule as low interest rates can sustain the
servicing of higher debt levels. Is 100% the new 60%? High debt levels of countries are also seen as
the reason why interest rates have limited room to move up in the future, as
many countries would not be able to service their debt at higher price levels. As global economies
are recovering from the great recession central banks are slowly reducing their
accommodative monetary policies, with the USA taking the lead as inflation
rates are high and the call for action is increasing. Initially central banks
welcomed inflation as it was moving to their preferred 2% level, then dismissed
inflation as a temporary issue which would come down in 2022, then it was said
it was transitory and now it seems that inflationary pressures are more
persistent than initially expected and far from transitory. There is concern
for the dreaded wage-price spiral in which temporary inflation becomes
sustained when automatically linking wage increases to actual inflation. The
ECB position is that indexing is part of the problem, not the solution. However its own staff through their trade
union IPSO is calling for higher wages to protect employees purchasing power
against higher prices for goods and services. Eventually interest rates will
have to go up which makes the cost of borrowing more expensive for businesses and
homeowners with a mortgage. Higher interest rates are not expected to have a
significant effect on the market unless they rise drastically. In 2022 we expect property
prices to continue their upward trajectory due to strong demand and a shortage
of supply. In addition prices of building materials are likely to rise,
especially steel and cement adding upward pressure to prices of newly built
properties. When it comes to carbon dioxide pollution both industries are
amongst the biggest polluters. The transition to a more environmentally
friendly production process will take years and large investments, which is
likely to lead to price increases. The CEO of Tata Steel, a major steel
producer, sees the average price of steel at a much higher level in the coming
10 years (Average above $600 per metric tonne) than in the past 10 years
(average $400 - 450 per metric tonne). From 2022 the Portuguese economy should feel the positive effect from the EU
Recovery and Resilience facility which aims to mitigate the economic and social
impact of the coronavirus pandemic while making the economy more sustainable,
resilient and better prepared for the challenges posed by the green and digital
transitions. It consists of grants and loans. The loans supplement the grants
to enable the investments needed, but are subject to approval from Brussels,
which is a good thing so funds cannot be squandered away. Part of the fund will
be made available for housing. In total Euro 672.5 billion is made available to
member states over a period the period of 2021 to 2026. Portugal stands to
receive Euro 16.6 billion of which 13.9 billion is in the form of grants and 2.7
billion in loans. In August 2021 Portugal received a pre-financing payment of Euro 2.2 billion, equal to 13% of the allocated facility.
With little new supply
it is a demand driven market. After January 2022, investors will no longer be
able to apply for a golden visa when purchasing real estate in the Algarve.
From now on, the new rules will only allow low density residential areas. In
addition to the Algarve this also includes Lisbon and Porto. As supply was
already tight we do not expect this to have an impact on property prices.
During lockdowns people had time to reflect on the way they live and their
careers. Some came to the conclusion that they wanted a better quality of life
with more outdoor space or decided to follow their dream to live abroad. We
expect this trend to continue on the New Year. As the economic
recovery in Europe continues, unemployment levels have fallen to pre-pandemic
levels in September. Portugal exceeded its pre-pandemic employment already in
Q2 of 2021. There is a shortage of employees just like in other countries where
they talk about the great resignation, where have all the workers gone to? They
may have chosen early retirement or a different career path including moving
abroad or are simply preferring to stay at home as a result of Covid angst.
Just like in other
European countries there is a shortage of affordable housing for starters to
buy or to rent. Decades of under investment in this segment of the market
cannot easily be undone. The economic stimulus may have kept people in their
job, but it also widened the division between the haves and the have nots as
easy money has inflated financial assets including real estate. The ECB has
warned about the increased exuberance in property markets which may prove vulnerable
and susceptible to a correction in case interest rates rise sharply due to
higher than expected inflation. Nevertheless investors will continue seeking
alternative investment opportunities such as real estate due to negative
interest rates on saving accounts. Expect the search for yield to continue in
2022. Due to rising inflation the worlds leading economies will have the
lowest real interest rates in as many as 50 years. There is a correlation
between real rates (nominal rates minus inflation) and financial assets. When
real rates decline the value of assets go up. Real rates are currently
negative. When using consensus inflation forecast for 2022, real rates are
approx. minus 2.7% in Germany, 3.2% in the UK and 3.3% in the USA. In other
words, the cost of borrowing money has not been this low for a very, very long
time.
If the increase in
Covid infections is putting you off from buying a property then you would also
not have bought in early 2019 at the start of the pandemic and would not have
benefited from a rising market. Of course prices also can go down in the future
for various reasons, e.g. an economic recession, imbalance in supply and demand
etc. However in the long run prices go up due to rising wages, higher cost of
materials, product innovation and general inflation.
Should you decide to
make the Algarve your home, you will find that the local Portuguese people are
friendly and welcoming. The Algarve is truly a melting pot of locals and
foreigners from all nationalities and cultural back grounds. Its also a place
with lots of sunshine and good food but I guess you already knew that!
If you are the owner
of a good quality property and wish to sell, please contact us. We are keen to
offer your property to our prospective buyers.
Robert Bijker
Director
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