Real Estate: Where do prices go?

The health crisis has created an unprecedented situation. The real estate market has stagnated, transactions have not yet resumed, now it is good to know what will happen to the prices.

The housing market came to a standstill on March 18^th , when mandatory confinement and a state of emergency were implemented by the Portuguese government. This deprived us from visits and real estate transactions.

Now we are leaving the pause mode and resuming our professional activity.

On May 18^th we started, in a first phase and with the proper social distance, making visits to the properties and we feel a fresh start of the activity. It is mainly since June1st though that, by maintaining the restrictions on our activity as ordered by the DGS, the resumption of activity was indeed possible, especially thanks to freedom of movement.

The two-and-a-half-month period that has just passed has plunged all players in the sector - professionals, buyers, sellers, landlords, investors, tenants - into a virtual paralysis that digital tools only partially mitigated.

What does the future hold after this brutal shock? What economic consequences will be felt in the coming months? No historical comparison is really relevant. But from September 2008 (Lehman Brothers bankruptcy) to the Spring of 2009, the housing market collapsed due to a lack of transactions, before adjusting rapidly from mid-2009 to summer 2011 (euro crisis).

On the eve of a gradual return to normal life since the beginning of June, the outlook for the housing market is still hard to imagine. Has this pause imposed on our sector broken the positive momentum brought by sales volumes and real estate prices, which still present at the beginning of the year, and which was part of a favorable trend since 2016? Or will the health crisis create a lasting shock that will severely dampen activity and lower prices?

There is no reason to assume that the real estate sector is not affected by the impact of a crisis that has destroyed the economy. However, the purchase of a property is an investment that represents many years of net income and for which the buyer can assume 20 or 25 years of debt. With the economic shock, this health crisis will inevitably affect the purchasing power of households, especially in the event of a nearly 10% increase in unemployment after lockdown.

Comparing our market with some others especially in Asian countries that have already left the lockdown about 2 months ago, the market will in some ways suffer a drop in activity of about 30% compared to 2019, both for resale and for new purchases. This is because our 2020 real estate year will realistically have 9 months.

With a loss of more than two months, expectations of a shrinkage in household incomes and a slowdown in lending, the number of real estate transactions will decrease. With the possible exception in the most emblematic and prime assets in larger cities such as Lisbon, Porto, Braga, Coimbra and the Algarve region.

In tense markets such as our capital city – Lisbon -  and the Algarve, there is not enough supply in relation to demand and the natural clientele has higher earnings and greater financial strength. We estimate that it is likely to see a correction and adjustment in prices of circa 5 to 10%. In medium-sized cities, our opinion is a little more close to that of idealista.pt which highlights a decline that can be twice as large, because the families living there sometimes have less solid financial situations.

Text: Paulo Lopes