The interest of foreigners in real estate in Portugal has led to sharp rises in prices. Central bank sees signs still "limited" of overvaluation, but alert for risks of possible correction.
The meteoric rise in house prices begins to put a risk to financial stability. The warning was left yesterday by the Banco de Portugal, concerned about an increase of more than 30% in prices since mid-2013. The entry into force of foreign investors is one of the main reasons for the real estate boom, he explains.
The central bank said in the Financial Stability Report released yesterday that "indications of price overvaluation in the housing market in aggregate terms" are still "very limited". But he notes that "the duration and rate of growth of prices in this market may entail risks to financial stability, should these dynamics persist."
Only half a year ago, the bank led by Carlos Costa argued that prices were "close to levels justified by economic fundamentals." It now points out that since the second quarter of 2013 the increases were 32% and 27% in nominal and real terms, respectively, causing prices to show signs of going beyond the fundamentals of the economy. The rise is higher than in countries such as Germany, Belgium, Spain, France and the Netherlands.
The interest of foreign investors is one of the great reasons pointed out by the Bank of Portugal for the worsening of real estate prices. "The dynamics have been very driven by tourism and the performance of non-resident investors," he says.
The rise in home prices has had a positive impact on the Portuguese banking system. "It facilitates the sale of properties held by credit institutions and contributes to the decrease of NPLs associated with loans secured by real estate," he argues. Last year, banks reduced bad loans by 20%, equivalent to 9.3 billion euros.
The good winds of the global economy at the same time with historically low interest rates drove home prices. But the central bank fears that possible sharp falls in prices could jeopardize financial stability. This should include "events of a geopolitical and economic nature, as well as the eventual imposition of protectionist measures" leading to an economic slowdown and greater caution for investors.
The supervisor stresses that "the relevance of non-residents in this market increases the vulnerability to abrupt and significant rises in international risk premiums, given the more rapid adjustment that tends to characterize these investors." Problems in the economy abroad would also affect Portugal, with a "break in revenues associated with tourism and the dynamics of local accommodation."
This risks that those who have contracted credit may begin to have greater difficulties paying the installments of the loan and forced sales of houses, which would lead to a "downward correction of prices."
Braking in credit
The Bank of Portugal considers that the granting of credit is not the main cause for the rise in house prices. Although the increase in new loans granted is accentuated, the supervisor notes that the pace of depreciation is still higher than that of new loans. And most of the real estate is bought without recourse, he says.
In the last months of 2017, only 41% of the value of the transactions were made with credit; before the financial crisis that proportion was 65%. Still, in 2013, only 20% of purchases were secured by bank credit.
Despite loosening the banks' credit lending policies on rising home prices, the supervisor still wants banks to start borrowing brakes.
Among the measures, announced in February and coming into effect as of next month, is the recommendation that bank loans can not exceed 90% of the value of the property pledged as collateral.
The Bank of Portugal notes that given the rise in prices, new borrowers are asking for higher loans against the value of the property. This increases risks for both banks and borrowers and tends to be associated with higher default rates. Even more so when house prices may be above their fair value.
News: Diário de Notícias