The problem is not new, nor is it Portuguese originality. There are many countries in Europe where rising house prices have made access to decent housing out of reach for a large proportion of citizens. It was in November 2021 that the European Commission warned of signs of possible house price overvaluation, signaling Portugal as one of the EU countries where it identified greater risks of a future abrupt correction in the property market. At the same time, a team of researchers coordinated by Paulo Rodrigues responded to the challenge of the Francisco Manuel dos Santos Foundation (FFMS) and tried to analyze in the study The real estate market in Portugal – prices, rents, tourism and accessibility, are multiple dimensions. The research spanned the past decades and stopped in early 2020 – right when the covid-19 pandemic broke out.
Paulo Rodrigues, a researcher in the Economic Studies Department of Banco de Portugal, tells PUBLICO that some parts of the research will be updated, namely the part that analyzes the behavior of prices and can help understand how they are determined. and the reasons why they fluctuate. “We might think that the pandemic would lead to a fall in demand and that the relentless shock to GDP would lead to a cooling in prices, but that has not happened. We will have to understand why,” says the researcher.
Exuberance, they say
In fact, Paulo Rodrigues, PhD in Econometrics at the University of Manchester and professor at the Universidade Nova de Lisboa, is one of the researchers who – along with Rita F. Lourenço and René Huget – signed the chapter of the study describing the behavior of prices. analyzed and the factors determining the fluctuation.
Rodrigues never mentions speculative bubbles, but they are well established in explaining the mathematical model the authors used to find “signs of exuberance” in housing prices. Especially since it applied economic models that were used to study the US speculative bubble that gave rise to the sub prime.
In terms of methodology, quantity regressions were used to assess whether there was divergence between house prices and their fundamentals, and whether there is exuberance as house price growth continues.
Of the various macroeconomic indicators that could be worked with, the researchers focused their work on the analysis of three fundamental determinants: disposable income per person, three-month money market rates and labor force data. These variables helped explain the variation in real house prices over the past few decades, whether they were rising or falling, as happened in the period of financial assistance.
The study finds that house prices in Portugal have grown by an average of less than 1% per year in real terms in the two decades leading up to 2007, and have increased by 1% from then until 2019.
In the past decade, however, there have been two periods of highly differentiated evolution: house prices fell by 4% between 2008 and 2013 and accelerated by more than 6% in the past five years. With growth rates of this magnitude, it is logical that the European Commission is concerned about the overvaluation of housing.
With the data collected, the team coordinated by Paulo Rodrigues sought to understand how these “bubbles” behaved in each local market, knowing that talking about exuberant behavior in the housing market without taking into account the differences that exist in each location would not be informative. are. Enough.
Using local-level price data for the 18 Portuguese districts (and the respective parishes of Lisbon and Porto), recurrent Dickey-Fuller tests were used to detect exuberant behavior (the GSADF test), which later allowed for the effects of contagion could be analyzed by parishes and neighboring municipalities, showing how a bubble in one market migrates to another.
In this analysis, it was possible to determine that prior to 2016, evidence of lavish behavior – that is, house prices well above the macroeconomic fundamentals that determine them – was “quite sporadic in the sample”. And that from mid-2016 the first signs of “then prolonged and widespread exuberant behavior” were registered in Lisbon and Faro.
Up to December 2017, exuberant behavior was already observed in four of the 18 districts surveyed (Braga, Bragança, Évora and Lisbon). Finally, the disaggregated analysis of the 18 districts and 278 municipalities in mainland Portugal showed extraordinary price increases for most districts.
The researchers looked for signs of the contagion effect of Lisbon and Porto in their surrounding municipalities – prices in the two main cities are rising, driving demand to neighboring cities, causing prices to rise there as well. And they realized that while Lisbon is at the forefront of the cycle of exuberance, this seems to have come to an end in the second quarter of 2019. Moreover, the exuberant behavior in Porto at the end of the fourth quarter of 2018 is not evident, “although there are strong signs of this kind of behavior in several districts”.
Paulo Rodrigues does not dare to find an explanation for this behavior. He prefers to point out that these results were obtained without including in the analysis other factors that researchers admit contribute to this price increase – such as investment in tourist accommodation, investment in real estate with a view to obtaining residence permits (“visa gold”) or the investment of major international real estate funds and the tax advantages they benefit from.
The Nova SBE professor explained to PUBLICO that statistics with sufficient time series were not available to be included in the analysis, so the research commissioned by FFMS tried to approach them differently in other chapters.
Economist Pedro Brinca, who also participated in the FFMS study and is one of the authors analyzing the importance of the real estate market for the macroeconomic dynamics in Portugal, underlines the fact that the 6% growth rate of house prices recorded in the study is identified hides “a very high heterogeneity”.
Pedro Brinca starts devaluing the “visa goldas responsible for the price increase. “A program that enabled the investment of seven billion euros (of which 90% in real estate) and involved the transaction of 10,322 homes in ten years, while more than 160 thousand homes were sold in the year 2021 alone, does not count . .’, shoot.
In another chapter of the same study, Pedro Brinca and João B. Duarte dispute the story that the price of real estate in Portugal is very high, arguing that the news referring to the maximum values reached by prices is a “distorted vision”. from reality, since the most important factor for the decisions of economic agents are relative prices – house prices adjusted for inflation”.
“Since 2014, there has been a strong growth in house prices, but if we take real house prices into account, the picture is not that impressive,” they write in the study. The main difference between the Portuguese market and the rest of Europe is the rental market.
When analyzing the rental market, it is clear that there are two very different periods in price evolution: before 2014, when this price was significantly lower than the European average, and after 2014, a period when Portugal has converged with its European colleagues on this issue . The recovery in prices coincides with the explosion in rents.
“The year 2014 is characterized by a limited supply (as investment in housing had already fallen for several years) and by a high demand, due to the upward trend of the tourism sector.” The explosion in rental value due to a lack of supply ultimately contributed “and a great deal” to the price increase.
The chapter signed by Pedro Brinca and João Duarte mentions that “the excessive rise in prices may be associated with a substantial growth of mortgage credit for the purpose of capital accumulation, in a context where high house prices are expected” .
The conclusions are similar when looking at house prices in terms of bank valuations rather than transaction value. “It should be noted, however, that banks have become more cautious about extending credit after the crisis. Banks are now much more robust in all ratios, they meet all solvency criteria and there is no systemic risk,” Pedro Brinca told PUBLICO.
The economist admits that the rate hike as an anti-inflation measure was inevitable, and foresees that many households will have to go through painful adjustments. But he does not foresee that the houses will end up in the portfolios of the banks, because they still have no interest in paying them off. Or that house prices suddenly start to fall.
Paulo Rodrigues admits the same, who bets more on a drop in sales volume and a drop in prices than on a fall in prices. He avoids futurology and says that the announced investments in housing (through the Recovery and Resilience Plan) are far from flooding the market and driving prices down. “I think there could potentially be a slowdown in price growth. But in recent years we have learned that exuberant prices are indispensable.”
The evolution of house prices, the causes, consequences and contextual factors. In this series of six works, PUBLICO X-rays the housing market in Portugal, with the support of the Francisco Manuel dos Santos Foundation, promoter of the study The real estate market in Portugalpublished in 2022.