Real Estate - What is the strength of Real Estate compared to other forms of investment?

The sharp drop in the stock market in February-March has shown that the real estate asset can continue to be a safe haven. The lower profitability of real estate also mitigates any immediate impact on prices, since it manifests itself in existing ones, which are much more volatile. An investment in real estate is never made to last only one year, but in most investments, a form of capital investment that yields long-term returns, sometimes during twenty or more. We recall that between the last crisis of 2008 and the present one only twelve years have passed, and that even if the properties will suffer some decrease in price we still have 8 years to recover! 

The certainty of historically low key interest rates, thanks to the European Central Bank (ECB), is also a supporting factor. The rates of housing credit in Portugal take into account that of Treasury bonds (the 10-year OAT), which remains close to 0.5 %. Then there will be strength and capacity for a brief recovery. 

The weekly newspaper Expresso published on 23 May, in a major article, stated that the residential heritage of families had not stopped increasing since the 2011/2013 crisis. And that its acceleration was particularly evident in 2018 and 2019, having risen by almost 19% in the last two years. 

These data come from the annual series of household wealth recently updated by Banco de Portugal. These make it possible to assess, at market prices, the wealth held in housing and adjacent land by households resident in the country. 

The turnover rate of the residential market in Portugal has remained constant in recent years, excluding the 2008 crisis phase. It has also been seen that private wealth in Portugal at the end of the 1980s was 70% and now no longer accounts for 50%. However, new factors have emerged and long-term leasing will grow, a natural consequence of which will be more real estate transactions for this purpose. 

The rate will persist in the long term, even with the impact of a fall resulting from two months of inactivity. With a forced confinement for more than two months, the housing needs of households remain unchanged. 

In any case, the price inflation, feared at the beginning of the year, will be avoided! Coronavirus has calmed the residential market. Buyers will probably put themselves in a position of weighting, sellers who are not in a hurry will be tempted to withdraw their property from the sale. A drop of 10 to 20% in prices may come about, above all and especially in compulsory sales caused by divorces, inheritances, reinforcement of equity capital and financial liabilities such as credits. 

A faster recovery of the housing market after the crisis is also possible if the stock market remains volatile and buyers feel they can buy at more attractive prices than in early 2020. The big unknown here remains the real behaviour of banks in designing credits, despite the clear incentives of the ECB. 

The new function of real estate has expanded and gained even more significance in the face of the health crisis. Remembering the popular saying "Better a bird in the hand than two in the bush", meaning that with the instability of the stock market real estate investment has always been safer than the promises of brokers, and thus a safe haven for my capital. It may also have the function of a retirement savings account applied to real estate and real estate funds, as they have been the most resilient during the health crisis, and whose effect, compared to stock market-based funds, is even stronger than before. 

Being aware that money is protected by acquiring and maintaining property, and also having a comfortable home that provides physical protection, especially against the virus, makes us understand that the idea of a property has been reinforced. Thanks to teleworking, a cottage less than two hours from your place of professional activity can also become an office, a balance between pleasure and daily work. 

Our starting point as a Casaiberia company will be the preparation for the reinforcement of sales from September onwards, when we believe in a significant resumption of activity, and take advantage of the summer period to quantify the magnitude of the consequences of the crisis, leaving behind the issue of the temporary reduction of prices, as time remains timely. 

 

Text: Paulo Lopes

Picture: Jason Goh by Pixabay