Real estate bubble? There has been “possible excessive growth” in prices for four years.

A study by the Francisco Manuel dos Santos Foundation concludes that since the end of 2017, prices have increased exuberantly.

“The aggregate house price index in Portugal shows possible excessive growth from the fourth quarter of 2017”. This is one of the conclusions of a study by the Francisco Manuel dos Santos Foundation on the real estate market, published on Monday.

It is mainly in Lisbon and Porto that these “excesses”, which the authors of the study describe as “exuberance”, are manifested, but they produce a contagion on the outskirts of the cities. In fact, “the existence of extraordinary price growth” occurs in the “generally districts” of the country. And “there seems to have been a contagion effect from Lisbon and Porto to their surrounding municipalities, but to a lesser extent in the case of the latter”.

Between 2014 and 2020, house prices increased by an average of 6% per year in Portugal. Over the same period, GDP grew by an average of 2% between 2014 and 2019, contracting by almost 8% in 2020, due to Covid-19. Whatever the prism, it is clear that the evolution of the economy does not in itself justify the evolution of prices.

This is why the authors of the study include a number of variables in the study: disposable income, population, employment, level of interest rates on loans and alternative investments, availability of building plots and their cost, as well as the investments made in improving the existing building stock. However, those that carry the most weight are disposable income and interest rates. Which were historically low during this period.

“Another important driver of the Portuguese real estate market is tourism and investment in tourist accommodation,” the study explains, adding foreign investment as a “variable that drove up housing prices.”


However, disposable income in Portugal will now contract – with rising inflation – and interest rates are rising, albeit slightly, for the time being. What risks can this entail? The study does not focus on these current contours, but without referring to them, it leaves clues about possible impacts:

“Unexpected events in the housing market, including house prices and mortgage lending, have spilled over to the rest of the economy, mainly because they trigger crises in the financial sector and depress consumption and inflation. household investment,” the authors write.

On the other hand, the existence of mortgage contracts with variable interest rates, especially in the case of families with low levels of liquidity but owning their own housing, amplifies “the impact of aggregate shocks on the economy from the real estate sector.

It is that housing, especially if it is own housing, “is an asset with high transaction costs and little liquidity”. This has the consequence that a family, faced with a sudden shock of loss of income or an increase in the cost of a mortgage, finds it difficult to transform its (real estate) wealth into cash. And “housing is the main asset of most families, so fluctuations in its value can affect homeowners’ consumption”.

In addition, there are possible impacts on banks: “If house prices fall sharply, banks could tighten credit conditions, which could lead to a credit crunch with an impact on economic activity”.

The study by the Francisco Manuel dos Santos Foundation is coordinated by economist Paulo MM Rodrigues, together with 14 other authors, providing a detailed characterization of the real estate market, in its various dimensions.

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