House prices are stabilizing in Portugal and are likely to remain so in the next one to two years because of a sluggish economic recovery, according to a new analysis.
According to the National Statistics Institute (INE), the house price valuation per square meter reached €981 in the first quarter of 2013, a decade low, but since they have recovered slightly by 4% to €1,019 in the third quarter of the year.
In the coming years, according to the analysis by Fitch Ratings, the stabilization in house prices will be sustained by two factors: nominal house prices which are already among the cheapest in Europe in absolute terms and the fact that households’ real disposable income relative to real house prices has converged to pre-crisis levels.
But overall the house price decline from the peak has been around 20% and demand for new housing is expected to continue to be relatively depressed in the coming years and prevent a full recovery of the housing sector.
‘This is explained by two predominant factors: firstly, Fitch expects economic growth to remain sluggish; and secondly, the deleveraging process of the banking sector will continue to restrict households’ access to credit,’ says the report which also points out that according to the Bank of Portugal, the NPL ratio on housing loans reached 2.2% in the third quarter of 2013, its peak since the start of the financial crisis.
The report also says that NPL levels tend to be highly correlated with mortgage interest rates and unemployment rates. ‘In Portugal, the NPL ratio has been most significantly correlated with unemployment and would have peaked at an even higher level if interest rates had not been at historical lows,’ it explains.
Fitch predicts that the BoP NPL ratio is set to stabilize around the 2.5% level in the next two years, alongside a gradual recovery of employment. Interest rates are not expected to increase significantly in the near term.
‘However, the risks remain on the downside, especially since most mortgages in Portugal are variable rate and are therefore extremely vulnerable to a surge in interest rates. Also, performance might be negatively affected by the increased segmentation of the labor market, where long term unemployment reached 60% of the total unemployed in the first half of 2013,’ it adds.
The report also says that a further tightening of mortgage lending is likely. It points out that the outstanding volume of housing loans peaked in the first quarter of 2011 and has since decreased by 7%, in line with the deleveraging process of the banking sector. New mortgage lending has been marginal since 2012, compared to pre-crisis levels.
‘Supply of new loans was adjusted downwards by the adoption of tighter credit standards by most financial institutions, which has resulted in fewer borrowers qualifying for new loans.
In line with Fitch's expectation of a very gradual recovery of the housing sector, the agency expects lending volumes to remain low in the next two years, driven by the deleveraging needs of the banking sector. It is likely that amortization of the outstanding mortgage book will outpace new lending leading to lead to a further decline in the size of the outstanding housing loan book,’ the report points out.
It adds that prepayment rates have decreased gradually to all time lows of around 3% since the onset of the financial crisis, driven by the decreased willingness of financial institutions to write new loans and tighter credit standards.
‘We expect prepayment rates to remain at historical low levels, given the limited refinancing opportunities. In addition, borrowers have little incentive to prepay their existing debt ahead of schedule under the current economic environment,’ it concludes.
This article was republished with permission from Property Wire.