Financial rating agency DBRS disagrees with the European Commission when it says that there is a “strong overvaluation” of house prices in Portugal. “We don’t consider there to be a bubble in the market.”
There is no “bubble” in house prices in Portugal, says the financial rating agency DBRS Morningstar, which disagrees with the European Commission’s analysis that there is a “strong overvaluation” in real estate. With house prices falling in parts of Europe, the trend in Portugal continues to be upward, even if at a slightly slower pace, which for DBRS only means that the market “is reaching the ceiling”.
“Taking into account the solid fundamental factors in the residential real estate market, as well as the relatively low unemployment rate and the increased interest in the country by foreigners, we do not consider that there is a bubble in this market,” DBRS writes in a note released this Monday by clients. In this analysis, which attempts to assess the level of risk of investing in financial instruments that are backed by Portuguese real estate, DBRS acknowledges that “it is a bit surprising” that house prices in Portugal continue to rise, especially given that there is a greater prevalence of variable-rate loans, which are more exposed to the ECB’s sharp rise in interest rates.
In addition to this effect of interest rates, which could be predicted to have a greater negative impact than it is having on house prices, DBRS also points out that the Government “has launched packages of measures that try to control house prices, which have become increasingly unaffordable for the average citizen”. Despite these two factors – interest rates and government measures – house prices will have increased, on average, by 7.6% last year, according to data from the National Statistics Institute (INE).
“Historically low levels of new construction, higher construction costs, a relatively more affordable cost compared to other European countries and greater foreign interest in the country are specific factors currently affecting housing prices in Portugal,” says DBRS, also noting that there are a minority of households that have bought a house at higher values and have not yet paid a substantial part of the capital – that is, This makes the sensitivity to higher interest rates less than a more superficial analysis might predict.
However, while he doesn’t think there’s a bubble, “the latest data shows a slowdown in prices as higher interest rates have reduced the amount of mortgage households can afford.” This is a factor that contributes, says DBRS, to the fact that the so-called “ceiling” is being reached, that is, a moment when the potential for appreciation begins to be limited.
DBRS admits, however, that “in the medium term, however, [no mercado imobiliário português] may change. The robustness of this market will depend on whether it is possible to “keep inflation under control, leading to a stabilization of interest rates”, and, on the other hand, on ensuring that the current economic slowdown in the euro area will be “relatively short-lived”.
