Another year has past and we are now at the end of the fifth year of the financial crisis. Over the past 12 months financial stability in the Euro zone has improved, as was to be expected. Economic activity has picked up in most European economies and we witnessed an improvement in business and consumer confidence. There are more signals that the European debt crisis is fading, just watch the steady decline in 10 year government bond yields in countries like Greece, Spain, Portugal and Italy. The price of gold (a safe haven in times of uncertainty) has fallen in price by almost 30 percent over the same period.
The Algarve has always attracted buyers from all over the world, therefore it is important to watch how other economies are performing when analyzing trends in property prices. The economy of Portugal is expected to remain weak going into 2014. It is no secret that Portuguese banks are undercapitalized causing stress in the economy. Although some banks have made an effort to improve their capital ratios, they are still too low. A new stress test for European banks has been announced which is positive, but I would be wary if none of them fail the test.
Signalling the stress in the lending system, the ECB is mulling a new round of LTRO. This time it comes with a condition: funding for lending. The previous rounds of LTRO (long term refinancing operation) was mainly used to prop-up government bond prices of countries under siege by hedge funds going short. Portuguese banks bought local bonds - with a bit of persuasion from the government - at low prices. With 10 year government bonds yielding now less than 6% (was 9 percent 12 months ago) the banks are sitting on handsome profits which can be used to offset losses on their loan portfolio. If implemented properly, the new round of LTRO can lead to an improvement of credit conditions for both businesses as well as households. A similar scheme (FLS, funding for lending) in England was very successful as both the British economy and its housing market staged an unexpectedly strong turnaround. It was so successful that only after 16 months after the introduction the Bank of England had to fine tune the program at the end of last month to head off the risk of a bubble in housing prices. Let one thing be clear, the central banks of Europe/England/USA are very determined to get through this crisis which sooner or later also for Portugal will lead to higher economic activity as well as a recovery in property prices.
Due to the bailout, the Portuguese government has limited room for manoeuvre when it comes to formulating new economic policies. However, on one front it has booked success. Programs like the Golden Visa and the NHR (Non-Habitual Resident) have proofed to be successful in attracting foreign buyers. The latter is especially interesting for pensioners who basically end up paying zero tax on income. Portugal’s recently introduced Golden Visa has not gone unnoticed in Spain too, which has now a similar program in place to attract investors.
There is a misperception in the market that foreclosed properties sold by banks offer better value for money than a resale. Contrary to what some websites make you believe, this is in most cases not true in Portugal, well at least not yet. Banks have been slow to lower the price of these properties and to bring them in line with the market due to balance sheet constraints, which simply means they do not have the enough capital for further write downs. However as the banks are aware of this they try to attract buyers with a lower interest rate versus their standard mortgage rate. This is not an attractive proposition for those who are a cash buyer.
Lastly, the improved trading environment for our sector which started last year continued in 2013. For next year we expect this to continue. If credit conditions for both businesses and households are to improve in 2014, there could be potential for upside surprises.
Land & Houses Algarve – Yellow Homes (AMI – 6232)
Rua Dr. José Pires Padinha 178
8800 - 354 Tavira
W: www.landandhousesalgarve.com | www.landandhousesalgarve.de
T: 281 320 281
