Whether through credit or cash payment – yes, it still exists -, the truth is that buying a house in Portugal is not always easy. Of the total amount, a large part concerns taxes to the State and the living conditions (low wages included) do not help you to save enough, much less when the objective is to buy your first home. And if you’re waiting for the real estate bubble to burst: it doesn’t look like it will happen soon.
The rise in housing prices is not a surprise, as it follows the trend of recent years. However, there is much about the price of a home that does not relate to the home itself, but rather to state taxes and fees. In other words, there is a large fiscal impact of each type of tax on the final purchase price.
“Between 25 and 30% of the final sale price of a house is tax. Divided between IMT [Municipal Tax on Transactions], IMI [Municipal Property Tax], stamp duty, construction VAT and IRC [Tax on Income of Legal Entities] that the real estate developer has to pay for the capital gains”, he begins by explaining to SAPO24.
“It is a considerable amount, and of all the taxes that contribute to this increase in prices, VAT on construction is the most significant”, he points out.
In an article in Out of the Box, Gonçalo Nascimento Rodrigues does the math in a simple example, for the purchase of a 200 thousand euro house in mainland Portugal, “for personal and permanent housing”.
“Also assume the contraction of a housing loan of €154,000, representing an LTV [guarantee financing ratio in housing loans] of 77%, in line with the average recorded in the market in 2022”, it can be read.
All things considered — considering the various taxes, such as IMT, stamp duty, IMI, construction VAT, IRC — “the tax inherent to the sale of a new house worth €200,000 is €54,554, that is, 27% of the price of sales”.
“VAT paid in construction represents the largest share of taxes paid (40%), followed by IMT (29%) and IRC (19%). The Developer’s net profit would represent 20% of the sale price of the house”, it is finally explained.
So, what can be done to reverse this situation? For the Real Estate Finance consultant, the answer is obvious: “lower taxes”. But you have to consider “the objective you want to achieve”.
“We are not going to lower taxes exclusively because we think that taxation in a certain segment or in a certain investment market is very high. There has to be a strategic objective”, he adds.
Thus, if the objective “is to allow an increase in the supply of new construction, it would be interesting to substantially reduce the VAT rate on new housing construction. If the objective is to allow the acquisition of permanent home ownership, the first, by young people or families, it’s probably best to review the IMT tables, for example. So, it depends”, he concludes.
Who buys a house in Portugal?
Considering all accounts, the question that arises is just one: after all, who can still buy a house? Gonçalo Nascimento Rodrigues points out that, generally speaking, “those who buy houses in Portugal are Portuguese and Portuguese families using housing credit”.
However, there is one detail to consider: “Portugal is very small, but it is very large. Housing is very heterogeneous, it is very different who buys houses in Santa Maria da Feira and who buys houses in Loulé”.
“There are places, especially large urban centers, where people use credit more for this purpose. In medium-sized cities and in areas further inland, less credit is used”, he explains.
“On average, most Portuguese people have to take out credit to buy their own permanent home. More than 70% of houses sold in Portugal have an associated credit and around 50% in terms of sales volume, in housing in Portugal, have credit”, he says.
Furthermore, the numbers prove the situation. In 2022, “financial institutions resident in Portugal carried out two million new credit contracts, with 1.5 million people, for a total of 28 billion euros. All these indicators grew compared to 2021”, according to information from the Bank of Portugal (BdP).
With regard to buying a house, “169 thousand people took out a mortgage loan, two thousand more than in 2021”.
And who are they? According to the data, “two out of three” lived “in the North region and in the Metropolitan Area of Lisbon” and “worked mostly for others and had a higher level of education”.
Regarding age, “61% of housing credit granted in 2022 was contracted with people aged up to 40”, “19% of new housing credit was granted to people aged up to 30” and only “1% of the amount of housing credit granted in 2022 was obtained by retired people”.
“In Portugal, of the total housing credit granted to retired people in 2022, half was granted to people with foreign nationality (mostly from Brazil and the USA)”, is also highlighted by the BdP.
In turn, “considering only the Algarve region, of the total housing credit granted to retired people in 2022, 85% was granted to people with foreign nationality (mostly from the USA, the United Kingdom and Sweden)”.
Do foreigners get all the houses?
Thinking that foreigners can buy more houses in Portugal than the Portuguese is, for the Real Estate Finance consultant, “a wrong idea, populist and biased by political ideology that a certain segment of the market wants to convey”.
“INE figures show that around 90% of transactions in Portugal or the volume of housing sales in Portugal is absorbed by Portuguese people and Portuguese families. This is statistical, there is no turning back”, notes Gonçalo Nascimento Rodrigues.
Therefore, he emphasizes, “the foreign market is a fringe of the market”, but “typically has greater concentrations in terms of location”.
“The issue is that 70% of the volume of housing sales in Portugal is made in the Metropolitan Area of Lisbon, Porto and the Algarve. There is a marked concentration of sales volume and there is a concentration in terms of shopping locations for foreigners and This gives the wrong idea that the market is inflated by foreigners who come to buy, which is not true”, he highlights.
However, it is true that “the market grew as it did due to several reasons, which occurred chronologically over time” and which contributed to the increase in prices — and the low supply.
“In the first phase, in 2013 and 2014, there was in fact a more significant weight in purchases from foreigners, namely through Golden Visas, fundamentally by Chinese buyers. But that was concentrated in that period and it was actually possible to verify that meaning around 15 % of transactions in Portugal”, begins by listing.
Then, from 2014 onwards, Golden Visas “gradually began to lose importance in the market, until a point was reached where it was possible to estimate that they corresponded to only around 3% of the market”.
Consequently, “other foreign buyers came to live here. But we need to demystify this issue that only foreigners with a lot of purchasing power come to live in Portugal”, he notes.
“Practically half of the foreigners living in Portugal are Brazilians and the overwhelming majority of them are concentrated in the Lisbon Metropolitan Area. Many of them do not have the financial resources to buy houses costing hundreds of thousands of euros, many of them rent houses”, says Gonçalo Nascimento Rodrigues.
Thus, this “significant demand has dried up the rental supply and this increases rents”. And it also has the same effect for those who “buy housing for the middle, lower-middle class”.
More recently, during the pandemic, the purchase of housing by foreigners “had a significant impact”, combined with “a very strong dynamic in tourism in Portugal” that had been going on since 2010-2011, due to “all the tax benefits that were introduced and programs for the development of Local Accommodation products”.
“In this last phase of the cycle, the covid phase allowed people to accumulate savings, because they spent less, to which is added the long period of mortgage loan moratoriums. This allowed people to save a lot of money and, on top of a very inviting monetary situation the acquisition of real assets and financing and credit, allowed them to make decisions when purchasing another type of house. In other locations, with more space, more expensive”, he highlights.
“And that’s how we got to this point. This idea that foreigners are the ones who come here to buy the houses that the Portuguese should buy is completely wrong, it’s fallacious”, he concludes.
So what about young people?
With all the difficulties regarding prices, it is certain that “there are strong barriers to entry into the real estate market”. “We have two levels of type of people who are now ‘suffering’: those who are already in the market and who have a house and have credit, due to the increase in installments; and those who want to enter and who cannot because prices are very expensive”, says the consultant.
And what is the solution?
“Those who have problems with payments have to save money. Obviously the most logical and appropriate thing would be to increase their purchasing power, by increasing their income. How do you increase income? By increasing salaries and decreasing them taxation among families, that is, lowering the IRS”, he highlights.
On the other hand, in relation to the first home, “certain sets of mechanisms can be developed without this meaning a direct interference with market pricing, either through an increase in supply – substantial in specific areas where it is clear that there is a preponderance of demand for the first home —, whether through the development of specific programs to support the first purchase, particularly for those who are going to use credit”. In other words, “there could be a component in the credit that could be guaranteed by the State”.
This example comes from the United Kingdom, as there are programs that include this assistance. “The British market has already developed this type of support. There is a part of the mortgage that is guaranteed by the state. Imagine, I am going to buy a house for 200 thousand euros, I am going to use 80% of the credit and of that 80% there is a part that it is guaranteed by the State. Afterwards, I only pay installments on the 80%, but on a smaller part”, he explains.
Is there a housing bubble about to burst?
Among the hope of being able to buy a house, the concept of a real estate bubble has recently emerged. Is this the future? It may not be that easy — or immediate.
“To be able to say that the market is in a real estate bubble, three things must happen: prices must rise very sharply, there must be a broad territorial dynamic of this price rise, that is, they cannot be limited to just one city or a small region, and there must be statistical evidence that this price rise was fundamentally fueled by debt”, explains Gonçalo Nascimento Rodrigues.
In Portugal, “these three premises only began to be verified since the beginning of the pandemic. Until the end of 2019 they did not occur, because there was no territorial dynamic of price increases, it was largely limited to Lisbon, Porto and Algarve, and there was no no statistical evidence that it was being increased by increased credit”.
In practice, “this increase in credit only occurred more markedly in 2020-2021 and 2022 and this contributed to an increase in prices with a much broader territorial dynamic”.
However, for the Real Estate Finance consultant, “with the increase in interest rates, in a natural way, the market is already counterbalancing this risk of a real estate bubble, due to a tendency towards less credit contraction”.
“I don’t believe there is a real estate bubble. There could eventually be, but external factors have to emerge that make it burst. There are many real estate bubbles identified around the world, many years ago, and they never burst”, he notes.
“There are some external factors that can contribute to this, namely a more pronounced and longer-lasting economic recession and any credit crisis event. We began to see, in a cascade, banks in financial difficulties and having to be saved with a lot of money. less capacity to grant credit to the economy and this obviously generates a credit event that then has repercussions, in the long term, in the eventual bursting of a real estate bubble. But, at the moment, I don’t see one or the other”, he concludes.
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Source: Sapo24