Algarve Real Estate Market and the mismatch of supply

"Artificial control of prices or the value of rents through mechanisms and legislation coming from the public sector will never be the solution to a problem of lack of investment in the private sector", writes the author

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Let's imagine the following scenario: a group of young people who were lucky to be born, grow up, study and have a good job in the Algarve. What do they lack? Well, the truth is, not much. Indeed, it is a group that has all the above reasons to smile, however, this group has another characteristic in common – not being able to own a house and, therefore, most likely rent a house or still live with their parents.

In recent times, we have all been overwhelmed by the impact that the coronavirus has had on the health of our wallets and our own health, all while housing ownership remains a distant goal for the region's younger segment. .

Unsurprisingly, the Algarve's latest economic recovery was based on tourism and the region's increased attractiveness. In addition to the many sunny days, top gastronomy and a safe climate, mostly private initiatives were added – such as the increase in the offer of golf and the diversification of air routes – which made it possible to reduce the seasonality of tourist demand in the Algarve.

It is also important to mention that the status of the “Non Habitual Resident” played a preponderant role in attracting foreign pensioners with high incomes, convincing them to spend their euros here.

What does this have to do with house prices? Essentially everything. Since the price of a good or service – in this case the housing price – reflects the equilibrium point of the demand-supply binomial, any mismatch between demand and supply, or vice versa, leads to an increase or decrease in the price.

So let's use statistical data to better understand this situation:

What caused this mismatch between demand and supply?

The answer lies in historical data. Data collected by INE and compiled by Millennium BCP in its quarterly analysis of the real estate market, show us that both the number of transactions and the average value of sales registered negative growth rates in the 2nd Quarter of 2010, and that they only returned to register positive growth rates after three years.

At the same time, the growth rate of new residential building construction was negative during the period 2007-2016. Concomitantly, the growth rate of building permits decreased throughout the same period.

In short: demand for housing took three years to recover, while supply took nine years. This, yes, is the main reason for the successive increase in housing prices in the Algarve – a clear mismatch between supply and demand.

Now that we've spelled out the problem (assuming rising house prices are a problem, which I don't agree), we need to look for possible solutions.

First of all, I would like to stress that, in my opinion, artificial control of prices or the value of rents through mechanisms and legislation coming from the public sector will never be the solution to a problem of lack of investment in the private sector.

The solution must be to provide the private sector with conditions to invest and strengthen the offer – in order to meet demand – thus establishing a new balance.

More specifically, the following measures may be considered:

>Take advantage of the new legislation for Real Estate Investment Management Companies (SIGI) to attract institutional capital/venture capital funds (Private equity), provided that they demonstrate that they have a medium-long term horizon and sustainable investment plans, adapted to the needs of the region and that allow the creation of lasting value for the region;

>To provide the banking system with the capacity to finance investment, on the supply side, with favorable conditions. This can be achieved through legislation that allows entrepreneurs in the sector to obtain financing for a greater percentage of the total value of new housing construction (Loan-To-Value), but with conservative criteria of maximum exposure for a single entity. Nobody wants more multi-million dollar bankruptcies in the industry;

>Implement incentives to capitalize, not over-indebted, of players on the supply side of the real estate market. The way the government has supported companies during the pandemic have been predominantly through encouraging over-indebtedness and credit. In due course, companies will have to pay back every cent they borrow and many may not have the financial means to do so;

>Promote the region's real estate market as an attractive market internationally, which is already the case, and with attractive returns, given the mismatch between demand and supply in the region;

>Grant these benefits only to companies that pay taxes in Portugal, but not in such a way as to create barriers to the entry of foreign institutional capital.

With regard to young people in particular, there are also demand-side measures that can be taken. Such as:

>Lighter legislation that allows young people to obtain financing for a higher percentage of the total value for the acquisition of their first permanent home (Loan-To-Value);

>Extension of the PPR tax benefits, in order to allow it to be used as a deposit in the acquisition of the first permanent home;

>Inclusion of financial literacy programs in the general education plans for students from 5th to 12th grade.

Wanting to go further, the possibility of implementing more generous systems similar to the “LISA – Lifetime Individual Savings Account" from UK.

The “LISA” is similar to a PPR, in which the State guarantees an interest rate significantly above the market for savings accounts, whose only purpose is to constitute savings for an initial deposit for the purchase of a first permanent home. There is, of course, a limit to the contributions that can be made to such financial products.

It should also be noted that such measures will have as ancillary consequences the creation of jobs, increase in national and local tax revenue and increase in gross fixed capital formation in the region.

I would also like to point out that such solutions are only viable in a scenario of mismatch between supply and demand, such as we have today, and that, therefore, it is important not to neglect the continued healthy growth on the demand side.


Author João Feliciano Martins, graduated in Business Management and Post-Graduated in Business Finance, both at the Faculty of Economics of the University of Algarve, is a trainee member of the Ordem dos Economistas – Regional Delegation of the Algarve.
He started his professional experience in retail banking, having then ventured into investment consultancy and financial planning.
He also provides management consulting services for an acoustic engineering company in the Algarve and is co-founder of CV Riser – a company that aims to automate and streamline the entire recruitment experience of national companies.


Note: article published under the protocol between the Sul Informação and the Algarve Delegation of the Order of Economists







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