No false optimism and no alarm bells ringing: what awaits mediation in 2023

Between euphoria and depression. The year 2022 presented itself as a bipolar, even schizophrenic year marked by various challenges in the global economy, and also in the real estate sector in Portugal. There was activity, dynamism and business, growing side by side with uncertainty, given the turnaround brought about by the war in Ukraine, in a post-pandemic scenario. Inflation soared, interest rates began to rise and the purchasing power of families and savings fell, with Portugal nevertheless remaining attractive as an investment destination. What to expect, after all, from 2023?

Real estate has responded well to the crises, and experts believe that the resilience of the sector will continue next year. After a dynamic 2022, and in some cases breaking records for home sales and real estate transactions, 2023 is, unsurprisingly, a challenging year, but also one of growth. Portuguese families will not have an easier time in terms of prices to buy a home, although a correction and adjustment is expected, which, nevertheless, will not be homogeneous, since the mismatch between supply and demand is a serious problem that remains unresolved.

Therefore, professionals anticipate a natural retraction or postponement of intentions to buy a house, especially for those who depend on bank financing - which is expected to be more rigorous and judicious. With no income compatible with the prices charged in big cities, some demand will have to adapt to the circumstances, and aim at the peripheries, but also at some inland areas. Foreign investment should remain constant and firm, with some nationalities standing out, such as the North Americans.

Without false optimism, but also without alarm, the mediators make an assessment of the activity in this last year, anticipating trends for 2023.

Review of 2022: a dynamic but "bittersweet" year

In 2022, the market remained dynamic and there was a growth in real estate transactions, "which proves the resilience of the sector, even in a scenario of uncertainty and many challenges, such as the one we are experiencing now", according to Patrícia Santos, CEO of Zome. For her, the real estate sector continues to attract a lot of investment and represents a safe option to invest, being "one of the most profitable ways to apply money.

Rui Torgal, CEO of ERA Portugal, also highlights 2022 as a "very positive year for the real estate sector, marked by a demand much higher than supply, despite the increase in interest rates and inflation". A view shared by Luís Nunes, CEO of ComprarCasa. "We have gone on to have inflation records of the last 30 years and Euribor rates of the last 15 years. Even with this reality, the truth is that the year 2022 will end with quite interesting numbers in the real estate market. You can sense a slowdown in the market, but a positive one," he says.

Interest rates and inflation are indeed one of the "hot topics" of the year, and they have a direct impact on activity, as well as on families´ budgets. Beatriz Rubio, CEO of Remax, points them out as "unexpected difficulties and that have influenced the market", to which one must add a "spectre of European economic crisis in 2023". In 2022, in fact, inflation has soared, as have interest rates, even exceeding the forecasts of many experts. And the rises should not stop there. The European Central Bank (ECB) announced again late last week a 50-point interest rate hike, and revealed that it intends to continue raising rates "significantly" next year to ensure the "timely" return of inflation to its 2% medium-term target.

Inflation in Portugal: how is it evolving?

This is a scenario that compromises the financial capacity of families to pay their expenses and comply, namely, with the payment of the house instalment to the bank. Despite this, in the December 2022 Economic Bulletin, the Bank of Portugal (BdP) indicates that the effort to pay house payments will stabilise for those with lower salaries. According to the regulator´s analysis, most families with variable-rate loans (including a home mortgage) will be able to maintain their consumption of essential goods and meet the debt service with their income in 2023. Even so, they would also need further support to offset rising interest rates and inflation.

"The instrument that central banks can use to influence inflation is the interest rate. By raising the interest rate and thus limiting the increase in available money in circulation, prices should fall or rise more slowly. But it becomes more expensive to borrow money, so people have less money available. This measure has therefore a repressive effect on the economy", comments Frederico Abecassis, CEO of Coldwell Banker Portugal. And because of this, according to him, in 2022, "some regression" has already begun to occur in some geographical areas, in clients who are more dependent on financing. On the other hand, he says that this rise in interest rates does not affect the international market, "which has remained loyal to investment in Portugal.

"The demand for property in urban centres by investors or clients with greater possibilities has been constant, however middle class families are looking more in the peripheral areas of the cities of Lisbon, Porto and Coimbra, and the growing demand for areas in the interior of the country is evident", also confirms Guida Sousa, National Coordinating Director of Decisões e Soluções.

Ricardo Sousa, CEO of Century 21 Portugal, adds that, despite the "cooling that is beginning to be seen in this final stretch of the year, it is estimated that the number of homes sold, in Portugal, in 2022, will increase by at least 5%, compared to 2021, and the overall volume of transactions should grow a little more, taking into account the increase in the average value of the properties transacted." On record sales and transactions, Juan-Galo Macià, president of Engel & Völkers Spain, Portugal and Andorra, highlights the "strong demand from international clients" which, he says, "has contributed to the steady growth of property prices in Portugal over the last five years".

A view shared by Rafael Ascenso, general director of Christie´s Front Door. He stresses Portugal´s ability, due to its characteristics, to "attract more and more foreign investors, and maintain a growth trend in counter-cycle with other markets such as the American and Swedish". "The truth is that international buyers see the country as very attractive places to invest and live. Quality of life, mild climate, ease of integration, security and cost of living that continues to be among the lowest in Europe," he stresses. 

For Alfredo Valente, CEO of iad Portugal, the year 2022 is not easy to describe. "We can say that everything is going well with our business, but it is impossible to leave out of the equation everything that is happening next to us," he says. "Healing the scars of the pandemic we are faced with a war in Europe, a crisis in the supply chains of raw materials, which has made them scarcer and more expensive. And in the second half of this year, the strong impact of inflation and the consequent increase in interest rates, in an attempt to control it, made life very difficult for the Portuguese. It is therefore a bittersweet year," he explains.

What to expect for real estate in 2023

• House prices: stabilisation and adjustmen

House prices in Portugal continued to rise in 2022. The most recent data from Idealist reveal that in November, houses for sale were 1.9% more expensive compared to the previous month, costing 2,460 euros per square meter (euros/m2) in median terms. The rise in house prices to buy was visible in almost the entire Portuguese territory, as houses were more expensive in 17 district capitals. Taking into account the quarterly and annual variation, the prices of houses to buy in Portugal rose 2.8% and 5.9%, respectively.

But in addition to the lack of supply for the high demand, there are other reasons that justify the imbalance in the Portuguese residential market that is driving up the cost of purchasing housing, including stable employment - unemployment levels are the lowest in the last decade; greater savings by families; the willingness of banks to grant home loans; foreign investment; as well as the rise in construction costs, which again skyrocketed with the war.

Year-on-year change in house prices

Given rising interest rates on home loans, and lower purchasing power due to high inflation being experienced, demand for homes could weaken and therefore pave the way for a cooling housing market. According to a recent analysis by the Financial Times (FT), the risk of house price deceleration is different in each country, but almost all are expected to experience a general slowdown by 2023.

This outlook is shared by Portuguese real estate professionals. Ricardo Sousa, from C21, considers that "there will certainly be, in the used property market, a stabilisation and more rational definition of sale prices", and recalls that this is a very different context from what we experienced in the past. "Currently there is no excess family debt, there is financing available and the risk of default with the rise in interest rates is much lower than during the last financial crisis, because since that time the criteria for granting credit has changed radically, to ensure greater robustness and sustainability of the system," he argues.

For Rui Torgal it is therefore likely that we will see "a deceleration of demand in the real estate sector, resulting in a correction of prices that will not be homogeneous". The ERA responsible stresses, however, that "a possible price adjustment does not mean, by any means, an abrupt drop, since the factors that contribute to the current value of houses will continue to be a reality: shortage of supply, construction costs and lack of labour". A view also shared by Beatriz Rubio, for whom it is "natural" to "see some decreases", although we can still "see increases in places where there is a huge gap between supply and demand, which is the main cause of price variation". The head of Remax also anticipates a drop in activity in certain areas, as a result of reduced demand, as well as a stabilisation of prices.

"We expect 2023 to be a year of attenuation of the average growth pace of recent years in number of transactions. If in the last 4 years the market grew at an average rate of almost 3% per year, this year the growth is expected to be significantly lower, tending towards stabilisation. This is based on the assumption that inflation will also tend to stabilise or even begin to decrease and that, throughout 2023, we will see interest rates at roughly the level we have now", states Alfredo Valente. For the head of iad Portugal, we will most likely see "a stronger retraction by the national buyer - who is more sensitive to financial credit conditions - than by the foreign buyer".

The biggest challenge for real estate consultants in 2023, he says, will be to manage "the expectations of their clients, since we can expect a widening of the average transaction period, on the one hand, and the negotiation margin, on the other". "The real estate consultant´s professionalism and resilience will be truly tested," he argues.

• Buying a house: changing search criteria?

Interest rates are expected to continue to rise throughout 2023, a situation that will force the Portuguese to redefine their housing demand criteria, "namely the amount they can spend to buy a house and the areas where they will have to look for housing solutions, according to the existing supply in the respective price range", says Ricardo Sousa.

Patrícia Santos believes that we will see pressure on prices in the areas of greatest demand, as the expectation for 2023 is that this pressure will continue in those areas, essentially in large cities, such as Lisbon and Porto, but that this "phenomenon is already beginning to occur in the more peripheral areas". On the other hand, in less densely populated areas, there may be a price correction. In addition, according to Zome´s CEO, "a reduction in demand is to be expected, especially among younger people and those with less equity capacity".
On the other hand, he stresses, "the demand from foreign clients will be increasingly greater". "Since the pandemic and with the intensification of telework, Portugal has become a very attractive country for these investors and demand will continue to increase, especially in large urban centres and coastal areas of the country, which will mean that prices in these locations will remain very high and almost inaccessible to national clients," defends the head of Decisões e Soluções.

Rafael Ascenso also believes that real estate will continue to be the safest investment for 2023. However, he says, there will be "opposite effects on the market according to the financial ease of families". The managing director of Christie´s Front Door gives the example of the majority of Portuguese who, unlike foreigners - who have the same problem of inflation, but who "find in Portugal a mature real estate market at a much lower price than in their countries of origin" - live "with a monthly budget with no slack".

"Inflation of 10%, represents 100 euros less per month for every 1000 euros of income. If we add to this the increase in interest rates - which are reflected not only in house payments, but also in car payments - we arrive at the conclusion that a family with an average disposable income of ¤2.500/month and a mortgage, is suddenly left with 500 to 600 euros less per month. And these are the agents that are not going to look for a house so soon and reduce demand", the responsible argues. 

• Challenges and opportunities

Rui Torgal has no doubt that opportunities will continue to exist, "since a house is a basic necessity and real estate has historically been and always will be a safe and secure investment". For ERA´s CEO, the biggest challenge is uncertainty - which will dictate the stabilisation of the market, when it dissipates - but also the "construction of new work at prices accessible to the Portuguese middle class", as there will be no short-term solution to the problems inherent in construction costs - aggravated by the war in Ukraine and the result of raw material prices, labour shortages and supply chain constraints - combined with the difficulty in licensing processes.

"There are several challenges facing the sector, with the increase in supply probably being the main one," Beatriz Rubio also stresses. For the CEO of Remax, it is necessary to "invest in the development of the peripheries, in clearing the licensing processes, in curbing the rise in prices of construction materials and energy, in encouraging adaptation to new technologies and the environmental sustainability of buildings. "2023 will undoubtedly be a year with many challenges, some of which are chronic," he stresses.

Luís Nunes believes that in 2023 "we will experience a dynamic of international demand, because we clearly continue to be a country that "is in fashion", for safety, for stability, for the climate, for gastronomy... We have to be attentive and know how to add value to the international consumer that, we have no doubt, will seek us out". In addition, the head of ComprarCasa believes that next year will bring news in the area of "green" solutions for real estate, ie, sustainable and environmentally friendly alternatives, so it is important to be increasingly attentive to these construction opportunities.

A view shared by Patrícia Santos, CEO of Zome, who points out as trends for 2023, among others, the focus on sustainability, "which will imply rethinking construction methods in order to make sustainable construction possible from an environmental, social, family, labour and business point of view"; a housing simplex, as it believes "that it is urgent to reduce bureaucracy in the processes that involve new construction and rehabilitation, to respond to the needs of the market and adapt them to the financial capacity of the Portuguese"; and the adequacy of financing to the reality of the market, "creating financial solutions for fringes of society, such as for example, young people who want to start their working life and cannot find in the market solutions adapted to their capacities".

"In 2023, the real estate market in Portugal will be based on two strong pillars: the high demand from abroad and the growing national interest created by the pandemic. New challenges will certainly arise, but the real estate sector has proven in recent years to have a great capacity for adaptation and resilience. In the luxury sector, the changes will not be so sudden, although we are already noticing that the decision is slower, but we do not believe in a decrease in demand", Juan-Galo Macià concludes.