The strange case of the pandemic and the price that doesn't go down

Average price of homes sold in Portugal during the 2nd quarter only dropped by 1%, although the number of home sales declined by more than 20%

With the advent of the Covid-19 pandemic, logic would dictate that a reduction in general economic activity would force real estate prices to follow suit.

However, reality finds a way to go against expectations; according to data from the National Institute of Statistics, the average price of homes sold in Portugal during the second quarter was only reduced by 1%, even though the number of home sales declined by more than 20% for the same period.

The Algarve is particularly interesting, with a reduction in the number of transactions of around 35,5% in the region, in stark contrast to the 8% increase in the average sale value.

How can this unnatural effect be explained when you would expect the housing market to suddenly sink?

There are several competing and complementary explanations for this effect. One of the most immediate explanations is the measures implemented by the State to cover the loss of income felt during the period of confinement, such as lay-off, and, above all, the moratoriums that suspend the payment of loans.

These measures reduced the risk of defaulting on financial commitments and as such, curbed any rush home sales needs.

On the other hand, the monetary policy pursued in the post-Great Recession period also assumes a special explanation for these effects; if, on the one hand, the price of money is historically low, the imposition of new regulatory frameworks and a whole new level of demand in relation to real estate financing imposed some discipline in the granting of credit.

Lenders who have acquired homes in recent years are not in as fragile a situation as they were during the Great Recession of the past decade.

With low interest rates, real estate continues to show signs of being a good investment when compared to investment alternatives.

Here, sellers' expectations come into play, who continue to view the pandemic as something transitory and temporary, so their sales expectations remain similar to pre-Covid, although they may change as time progresses.

However, and perhaps more so due to the pandemic, the real estate product is still a desired product; the period of confinement was especially brutal, and with many people resorting to telecommuting, some may have realized that they don't have enough space, and will look for new homes with more space.

Finally, it must be borne in mind that, although construction is portrayed as a glittering sector, the truth is that the overwhelming majority of real estate transactions concern existing housing. Only 14,4% of the houses traded in the second quarter of 2020 were new.

If, in the period 2001/2009, the national housing stock increased by almost 9%, in the period of 2009/2019, it only grew 2% in the period of 2009/2019, which shows, somehow, that the offer of new construction has not kept up with demand in recent years.

The high cost of construction, the growing complexity of building legislation, the scarcity of capital and the lack of growth in zoning foreseen in the municipal PDMs stifle new construction.

All of these real estate market conditions keep prices structurally high. The number of newly built buildings licensed for family housing in 2019, nationwide (12630 buildings, according to Pordata data), is a quarter of that recorded in 2001.

Can real estate prices continue to maintain their vigor? Inevitably, with the prolonging of the pandemic, with the possibility of the support network provided by the State and with the credit moratoriums to be lifted, it is expected that the price of real estate may change.

However, and given that increasing levels of uncertainty have inversely proportional effects on economic activity, we may witness a slowdown in investment in construction and real estate activity, with important effects on the real estate supply.

The increased demand on the provision of bank credit for housing, as well as the increased savings seen during the pandemic period, also make newer homebuyers a little more resilient to crises.

In Portugal, maintaining the current monetary policy and given that the supply of new housing has not even reached levels similar to those of the last recession, perhaps not even the worst recession in recent decades will be able to reduce the price of real estate.



Author António Guerreiro has a degree in Economics and a Master's Degree in Marketing from the Faculty of Economics of the University of Algarve, having completed postgraduate studies in the areas of Corporate Finance, Taxation and Geographic Information Systems at UAlg and Real Estate Asset Valuation at ISEL.
Completed the curricular part of the PhD Program in Innovation and Territory Management at the University of Algarve.
He is an occasional writer and columnist, with several articles published in the regional press and maintains an opinion space in a regional newspaper.
Effective member of the Order of Economists and of the Order of Certified Accountants, he is a Manager by profession, with experience in retail and real estate and is especially interested in regional development, land use planning, innovation and entrepreneurship.


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



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