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PROPERTY 2022 Update
PROPERTY MARKET UPDATE 2022
PROPERTY MANAGEMENT HAPPY HOMES ALGARVE
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From property expert Robert Bijker, Happy Homes Algarve
It’s that time of the year again when we reflect on the past year and provide an outlook for the property market in the year ahead, 2023. After two years of uncertainty people fully embraced the freedom to travel in 2022 resulting in an excellent year for the hospitality sector and property market alike. For most homeowners of self-catering accommodation in the Algarve rental income is at an all-time high and the year is not even over yet! Since beauty is in the eye of the beholder, the more people spend quality time in the Algarve the higher the number of prospective buyers. This is reflected in another record breaking year for the real estate market. With property prices rising during the 1st half of the year due to strong demand we now see prices coming off their highs. There are good quality/value properties on the market, but there are also many overvalued properties which are not selling. The supply of new and resale properties continues to fall short of demand. However, because interest rates are rising to combat inflationary pressures, buyers can borrow less than they could a year ago when interest rates were low. If they are unable to make up the difference, they must either adjust their requirements or postpone their property purchase. After a long period of price increases one can only welcome a period where the market cools down a bit. As a result of higher interest rates the economists of the ECB are expecting property prices in Europe to fall on average by 10% over a period of 24 months. This is good news for buyers, but the risk for sellers is that the market will have moved on by the time they are ready to lower their asking price. Depending on the size of the price reduction the property can still be overvalued as the market circumstances have changed. For home owners who need to sell it is better to stay ahead of the curve as this increases
the likelihood of a successful sale. The main reason for the market's cooling is rising interest rates as a result of high inflation. It’s not that interest rates are high historically. It is more a matter of adjusting the overvaluation of financial assets in general as a result of the ECB's extreme and artificially low interest rate policy that is now behind us. Because property values are less transparent due to poor and delayed statistics, while also being less liquid, they lag in price adjustment to changes in interest rates compared to other financial assets traded on stock exchanges on a daily basis. To put this in perspective using a sector whose market value is the most prone to interest rate movement, rising interest rates have had a devastating effect on the market evaluation of technology companies who were unprofitable. Their sky high valuation was more based on a story and the willingness of investors to provide money to gain market share as long as they were spending/burning money to get there. Due to rising interest rates the share prices of these companies have been decimated as investors focus on income generated now and not potential future income. Properties may be overpriced but they can generate income/ cash flow now, if needed. When determining valuation, the generation of cash flow (rent) should not be under estimated regardless of the property being your permanent residence or not. Real estate is known to be a good hedge against inflation, which is quite reassuring in the current high inflation environment we are in. Those who have a mortgage against their property will find that inflation erodes the value of the mortgage over the years. It seems inflation in Europe has peaked, however, this doesn’t mean that the inflation problem is behind us as it remains well above the ECB’s 2% target. Therefore, more interest rate hikes cannot be ruled out and rates may stay high for a prolonged period until inflation is more in line with the ECB’s inflation target. In Portugal, the majority of homeowners with mortgages have a floating rate based on Euribor for 6 or 12 months. As rates have gone from minus 0.5% to 2.8%, the interest component of the monthly repayment has gone up dramatically. On a mortgage of €150.000 this means an increase of €412.50 per month and causes financial stress for families at a time when their purchasing power is already eroded due to high inflation. Normally, a shakeout of weaker or overleveraged businesses, as well as homeowners who over borrowed, is part of the economic cycle. However, this did not happen during the pandemic as the Portuguese government offered financial support and tax holidays for businesses and individuals alike and banks put a moratorium in mortgage repayments for those who needed it. Will they again offer a lifeline to homeowners who struggle with the repayment of their mortgage? This may seem farfetched, but maybe it is not. The Spanish government is already considering relief measures for one million families with an income below €25.200 per annum. This, in addition to extending the repayment period of the mortgage by 7 years, cuts the increased financing cost in half. Will Portugal follow? On the other hand Portugal is a very popular destination for expats looking to relocate. It has a pleasant climate and plenty of sunshine, good internet connections, good medical facilities, low crime rates and relatively low cost of living. This, in addition to the various financial incentives make it highly likely that foreigners will continue to settle in Portugal in 2023. We also expect investors to continue seeking alternative investment opportunities such as real estate due to low interest rates on savings accounts. Although interest rates on savings accounts have gone up since a year ago, they are well below the level of inflation. Expect the search for yield to continue in next year. Lastly, there are some changes in 2023 regarding short term holiday lets. If you own a property that is available for short term holiday rentals, in 2023 you need to report your monthly rental income to the tax department by the latest on the 5th of the following month (this was the 12th). Furthermore, whether you have rental income or not, you must report to the tax department every month. Additionally, at the beginning of the year you need to register the new invoicing series for 2023 at the tax department before you can issue rental invoices. We expect 2023 to be a busy year and with a bit of luck we’ll see the war between Ukraine and Russia end and benefit from the peace dividend. Our multilingual consultants at Land & Houses Algarve – Yellow Homes have been living in the Algarve for a great many years and are experts in walking you through each step of the buying and selling process. We are currently looking to add quality properties all across the Algarve for both our Portuguese and International buyers. Why not contact us today?
