Time flies when you
are having fun! I can not believe how quickly the past 12 months have gone by. So
here we are again looking at the year behind us and ready to make a well-informed
market outlook for the year 2024 while knowing its tough to make predictions,
especially about the future.
We have been more
often right than wrong with our predictions over the past 12 years. But as we
are talking about the future sometimes they throw a curve ball at you when you least
expected it. Our curve ball was expecting property prices to fall with the
outbreak of COVID-19 as the lockdowns would have a significant negative effect
on economic activity and people could not travel. We did not expect central
banks to provide unlimited liquidity and push interest rates below zero. In
addition, banks allowed for mortgage repayment holidays to prevent home
foreclosures. Both actions were unprecedented and unexpected. Back in 2020 when
central banks intervened and local banks started to offer repayment holidays on
mortgages we adjusted our market view accordingly. It was clear there would not
be a washout.
Some foreign
prospective buyers are about to make the same mistake; they believe that the
current level of interest rates (they say high level, but historically it is
not) will lead to defaults on mortgage repayments and many forced sales leading
to lower property prices. This could be a standard scenario in Northern
European and Anglo-Saxon countries where market forces do their job and
foreclosure follows adding to more supply and lower property prices. In
Portugal, it works a bit differently. For starters, Portuguese banks prefer not
to be associated with the start of a foreclosure because it is thought to
reflect poorly on them. Many individuals believe that because the banks were
bailed out during the 2012 European banking crisis, they should be more
sensitive since they were rescued with public funds.
Second, there are
policies in place to assist people in financial difficulty due to the cost of
living crisis and the increase in interest rates on mortgages. In addition to
the government plan to assist the most vulnerable homeowners, which banks
need to carry out, most banks have gone a step further and begun directly
approaching homeowners to offer mortgage relief. In effect, it lowers the
monthly repayment amount by applying a lower interest rate for a fixed period
of two years with the difference in interest being added to the outstanding
loan value. It boils down to an extension of the repayment period. By the end of October, the five main banks
in Portugal have already renegotiated more than 100,000 housing loans due to the
difficulties that families are facing in paying monthly instalments.
So far the real
estate sector in Portugal has emerged as a beacon of resilience and a magnet for
international investors, setting new benchmarks and defying expectations in a
global landscape rife with geopolitical issues. Money keeps pouring in real
estate from Foreign Direct Investment. This also includes land for development
that may take years if not decades before construction starts and as such does
not alleviate the current housing shortage. Having said this, the IMF believes
that property prices in Portugal are 20% overpriced. The rating agency Moody s also thinks that property prices are overvalued and more recently the Bank of
Portugal has also joined in with similar remarks. This does not mean that prices
will come crashing down. Prices are generally determined by demand and supply
and the current imbalance could continue into 2024. There has been strong
demand for reasonably priced properties, but there is a limited supply of
resale and newly built properties. The current imbalance is likely to continue
into 2024, but may be less pronounced as the demand side has changed since the
Portuguese government has ended the Golden Visa scheme and the NHR program. In
addition, the socialist party (PS) who had a majority in parliament pushed
through the highly controversial Mais Habitacao legislation, which means that
no new AL (Alojamento Local) licenses will be issued for most of the Algarve as
it is part of the containment area (the council of Boliquieme and Castro Marim
are not included) and that under certain conditions a condominium can cancel
existing licenses. This may turn off some buyers who were counting on a return
from their property to cover operating costs when they are not staying there
themselves. However, it is less known that townhouses and villas are unaffected
by this as long as it is not a fraction. See if Fracçao is mentioned in your
property documents. It is also important to keep in mind that there exist other
alternatives that let a homeowner use their property for a portion of the year
while generating income from it.
In the meantime, headlines
in the local and international press about the controversial Mais Habitacao legislation
have made some buyers more hesitant. The PS has used Alojamento Local as a scapegoat
for decades of under-investment in affordable housing to buy or to rent and
hopes the restrictions will lead to more properties being offered for long-term
letting. However, most of these properties are medium to high end and if they
were to be offered for rent on a long-term basis the rent would be unaffordable
for people with a limited budget. The shortage of affordable housing is not
only a problem in Portugal, many European countries have the same problem. It
can only be resolved over time by government intervention to build more of
these types of properties. Owners who are wondering if they may lose their
rental license should be aware that there are various other ways to rent out a
property with a contract to generate income varying from a short period to
various months or a year. As the primary reason for most property owners of a
second home is to stay there a few times per year themselves, a long-term let was
not an option. It is worth knowing that a defined non-renewable rental
agreement of 12 months can also allow for a period or multiple periods for your
own use, as long as the periods are mentioned in the agreement. It suits
renters who once or twice a year were visiting their home country anyway. You
do not need an AL license for this but the property will need to have a valid
energy certificate.
The positive news is
that inflation is coming down. The OECD forecasts a reduction of inflation in
Portugal to 3.3% in 2024 and 2.4% in 2025. The downward trend is in line with
the decline in inflation in Europe and should in time lead to a reduction in
interest rates and lower borrowing costs. This would be good news for buyers
who need financing and also for existing homeowners with a mortgage when their
interest rate period is up for renewal as it will increase their disposable
income at a time when many families suffer from the cost of living crisis. However,
the ECB indicated that it leaves its interest policy on hold for the time
being, but does not rule out further increases if inflation figures require it.
For the moment higher rates seem unlikely as the global economy is in a
slowdown. Just look at the price of a barrel of oil; despite various rounds of
production cuts by OPEX it still hovers around the USD 80 mark.
So what to expect in
2024?
We believe demand and
supply will be more balanced due to the ending of programs such as the NHR and
Golden Visa and the implementation of the Mais Habitacao legislation. It is
putting downward pressure, especially on overpriced properties. Actually, we
are already seeing properties being reduced in price, some in the higher price
segment by hundreds of thousands of euros in one go. The only thing that would
change from the supply side would be the addition of more resales to the market
because, while government regulations are being implemented to expedite the
process, planning new construction is still a lengthy process. A negative would
be that inflation stays high for longer, and interest rates too. We also think
that by the end of 2024, it will be blatantly clear that the restrictions
regarding AL have done nothing to solve the lack of affordable housing.
In general, the reasons
to buy a property in the Algarve have not changed and will continue to draw buyers
from all around the World. These are often people looking for a better quality
of life and are increasingly unhappy about the political climate and tax
regimes in their home country. Over the last 12 years, we have witnessed
various waves of buyers from Scandinavian countries, France, Italy, and
Germany. In the last three years, we have seen many people from the USA and
Canada taking up residence in Portugal and as of May 2024, United Airlines will
become the first airline to offer direct flights from New York to Faro with
four planned flights a week. Often they start with a long stay renting a
property in the area of their interest while searching for their dream home.
Land & Houses Algarve is well positioned and receives inquiries on a daily
basis from American and Canadian citizens. Our multilingual consultants 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. In addition, our
sister company Happy Homes Algarve is often their 1st point of
contact when they look for rental accommodation so our client relationship
seamlessly progresses to assisting them with their property search.
If you are the owner
of a good quality property and wish to sell, rent or get more information about
your options, please contact us. We wish you and your
loved ones a most enjoyable festive season!
Robert Bijker
Director
|