Its 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, 2023.
After two years of
uncertainty people fully embraced the freedom to travel in 2022 resulting in an
excellent year for the hospitality sector and property market alike. For most
homeowners of self-catering accommodation in the Algarve rental income is at an
all-time high and the year is not even over yet! Since beauty is in the eye of
the beholder, the more people spend quality time in the Algarve the higher the
number of prospective buyers. This is reflected in another record breaking year
for the real estate market.
With property prices
rising during the 1st half of the year due to strong demand we now
see prices coming off their highs. There are good quality/value properties on
the market but there are also many overvalued properties which are not selling.
The supply of new and resale properties continues to fall short of demand.
However, because interest rates are rising to combat inflationary pressures,
buyers can borrow less than they could a year ago when interest rates were low.
If they are unable to make up the difference, they must either adjust their
requirements or postpone their property purchase. After a long period of price
increases one can only welcome a period where the market cools down a bit. As a
result of higher interest rates the economists of the ECB are expecting
property prices in Europe to fall on average by 10% over a period of 24 months.
This is good news for buyers, but the risk for sellers is that the market will
have moved on by the time they are ready to lower their asking price. Depending
on the size of the price reduction the property can still be overvalued as the
market circumstances have changed. For home owners who need to sell it is
better to stay ahead of the curve as this increases the likelihood of a
successful sale.
The main reason for
the market s cooling is rising interest rates as a result of high inflation.
Its not that interest rates are high historically. It is more a matter of
adjusting the overvaluation of financial assets in general as a result of the
ECB?s extreme and artificially low interest rate policy that is now behind us.
Because property values are less transparent due to poor and delayed
statistics, while also being less liquid, they lag in price adjustment to
changes in interest rates compared to other financial assets traded on stock
exchanges on a daily basis. To put this in perspective using a sector whose market
value is the most prone to interest rate movement, rising interest rates have
had a devastating effect on the market evaluation of technology companies who
were unprofitable. Their sky high valuation was more based on a story and the willingness
of investors to provide money to gain market share as long as they were
spending/burning money to get there. Due to rising interest rates the share
prices of these companies have been decimated as investors focus on income
generated now and not potential future income. Properties may be overpriced but
they can generate income/cash flow now, if needed. When determining valuation,
the generation of cash flow (rent) should not be under estimated regardless of
the property being your permanent residence or not.
Real estate is known
to be a good hedge against inflation, which is quite reassuring in the current
high inflation environment we are in. Those who have a mortgage against their
property will find that inflation erodes the value of the mortgage over the
years. It seems inflation in Europe has peaked, however, this does not mean that
the inflation problem is behind us as it remains well above the ECBs 2%
target. Therefore more interest rate hikes cannot be ruled out and rates may
stay high for a prolonged period until inflation is more in line with the ECBs
inflation target. In Portugal, the majority of homeowners with mortgages have a
floating rate based on Euribor for 6 or 12 months. As rates have gone from
minus 0.5% to 2.8%, the interest component of the monthly repayment has gone up
dramatically. On a mortgage of Euro 150.000 this means an increase of Euro 412.50
per month and causes financial stress for families at a time when their purchasing
power is already eroded due to high inflation. Normally, a shakeout of weaker
or overleveraged businesses, as well as homeowners who over borrowed, is part
of the economic cycle. However, this did not happen during the pandemic as 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. Will they again offer a lifeline to homeowners who
struggle with the repayment of their mortgage? This may seem farfetched, but
maybe it is not. The Spanish government is already considering relief measures
for one million families with an income below Euro 25.200 per annum. This, in
addition to extending the repayment period of the mortgage by 7 years, cuts the
increased financing cost in half. Will Portugal follow?
On the other hand
Portugal is a very popular destination for expats looking to relocate. It has a
pleasant climate and plenty of sunshine, good internet connections, good
medical facilities, low crime rates and relatively low cost of living. This, in
addition to the various financial incentives make it highly likely that
foreigners will continue to settle in Portugal in 2023.
We also expect
investors to continue seeking alternative investment opportunities such as real
estate due to low interest rates on savings accounts. Although interest rates
on savings accounts have gone up since a year ago, they are well below the
level of inflation. Expect the search for yield to continue in next year.
Lastly, there are some changes in 2023 regarding short term holiday lets. If
you own a property that is available for short term holiday rentals, in 2023
you need to report your monthly rental income to the tax department by the
latest on the 5th of the following month (this was the 12th).
Furthermore, whether you have rental income or not, you must report to the tax
department every month. Additionally at the beginning of the year you need to
register the new invoicing series for 2023 at the tax department before you can
issue rental invoices. We expect 2023 to be a busy year and with a bit of luck
we willl see the war between Ukraine and Russia end and benefit from the peace
dividend.
Our multilingual
consultants at Land & Houses Algarve have been living in the
Algarve for a great many years and are experts in walking you through each step
of the buying and selling process. We are currently looking to add quality
properties all across the Algarve
for both our Portuguese and International buyers. Why not contact us today?
Robert Bijker Director * Written on the 28th of November 2022, first published in the East Algarve Magazine 1st of December 2022
|