In the latest episode of the podcast "Mistério das Finanças", from the digital newspaper "ECO", Economy journalists Pedro Santos Guerreiro and António Costa wanted to know the answer to the question that everyone asks: will house prices continue to rise in Portugal? To do so, they invited the real estate businessman they consider to have the most knowledge of the market: Ricardo Costa, CEO of LUXIMOS Christies International Real Estate, the agency that represents Christie's International Real Estate, the reference real estate agency in the luxury segment, in Porto, Northern Portugal and the Algarve. The Portuguese affiliate of the prestigious British house Christie's has offices open in the North, in Foz do Douro, and in the South, in the heart of the Golden Triangle, between Vilamoura and Vale do Lobo.
With a degree in Economics from the Faculty of Economics at Porto University, Ricardo Costa, 49, has spent almost his entire professional career in the international market. He arrived in the real estate market in 2004 and, ten years later, the company he founded and which he has led since then, was awarded the prize for best office in the world ("Affiliate of the year 2014").
In this interview, Ricardo Costa explains how the final value of property is formed, but also why foreign clients continue to want to buy a house in Portugal. Without ignoring the fact that other countries try to be equally competitive in the conditions offered to retired people and non-habitual residents, namely in terms of tax advantages, the businessman stresses that the country has characteristics that are impossible to surpass. Find out here what they are.
Pedro Santos Guerreiro (PSG) - Contrary to what one would intuitively predict, house prices rose during the pandemic. Why didn't house prices fall?
Ricardo Costa (RC) - If we dissect the formation of house prices, the question is not complicated. What is it that forms the price? Is it speculation? Is it demand? There's a determining factor: during the first months of the pandemic, the market almost stagnated. It is not true that houses sell just as easily when people are unable to visit them. Although there are people who think that through Whatsapp or IFface things continue to have the same fluidity, the truth is that it is not so.
PSG- That is, for a few months, the price was not even representative, because there were no transactions.
RC - There was no market. There was no travel. Visits to properties were closed for health reasons. At a certain point, we can't say that the price went up or down. It was a bit unprecedented, but it was almost as if there was no legislation to sell a house. That's what happened.
PSG - In the following months, there was an upturn. If we look not only at the price but at the number of transactions, we notice that it did not fall significantly during the pandemic.
RC - We have to look at all this in aggregate: the cost of raw materials and labour has skyrocketed. During the pandemic, and even now, we are seeing the reflection of that. The most recent news refers to the increase in fuel prices. As there is no change in the structure of profit calculation, what we are witnessing, since the beginning of the pandemic, is an escalation of raw material prices.
PSG - You're talking about the building materials as well, so?
RC - Yes. Before we look at the price, we have to understand how that price is formed. And the price is formed by several factors...
AC - ... of course, the land....
RC - Yes, it starts right there. But if we talk about new construction, we can see that wood, concrete, aluminium, pipes, all of that increased exponentially. And it increased for several reasons. Unfortunately, the economy is not only made by teleworking. During the pandemic (and even now!) logistical processes were interrupted and made more difficult. Importing goods, raw materials, became very complicated. Deadlines were extended, logistics were complicated, many factories closed down. Timber itself was substantially interrupted.
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PSG - You were also talking about the workforce.
RC - Exactly. Labour is a huge issue in construction. Now, if there are restrictions on movement, on work, if there is legislation regarding teleworking, if there is inertia, if productivity levels decrease... Yes, it is much more difficult to contract construction now than before the pandemic. This all implies inflation in the final price. But the impact is not even being proportional, because many raw materials have increased by 35% and house prices have increased marginally.
PSG - This largely explains the price of new developments. Regarding second-hand homes, what is the explanation? There was an expectation that there would be, with the fall in incomes and the suspension of local housing, a large availability on the supply side.
RC - Then we already started to segment...
PSG - What has been the impact of the moratoriums with regard to second-hand homes?
RC - With second-hand houses, the following happens: many times, those who sell a second-hand house want to buy a first-hand house. The markets are interconnected. Because otherwise people don't sell. And many times they only sell with the expectation of buying something that might be interesting. The big issue is that both markets, the new and used market, always have a differentiation premium. We can't expect new homes to increase in price and used homes not. The market adjusts itself. Therefore, everything begins, in the first instance, with an initial impact of immobilisation and then an inability to supply raw materials, which changes the price. Regarding moratoria, they were an interesting resource. The banks did what they had to do, the process was facilitated, but people are going to end up paying for all this. This was a postponement. That immobilism carried over to the financial part. Families and businesses had a cushion, a certain comfort.
AC - We are already one and a half years into the pandemic. After the freezing of the market, does the market have the same dynamics as before the pandemic?
RC - In my segment, which is the luxury market, I can say that in 2020 we managed to end the year with a 10% increase in sales volume. This year, we are already above that.
PSG - Which only proves the inequality impact of this crisis. The high segment resisted better than lower segments.
RC - More than being the high or low segment, we have to look at the real estate and understand if it is residential (in first, second and third instances) or if it is not. Because there is a lot of real estate - let's talk about the big cities, especially Porto and Lisbon - that was sold before the pandemic, which had the appearance of being residential, but whose purpose was Airbnb. It was a non-residential activity, although related to tourism, which has a 12% weight in the Portuguese economy. There was a much more abrupt fall.
PSG - In relation to the typology of the houses, there is the perception that there has been a change in demand, with larger spaces, gardens. Does this correspond to the truth or is it just a residual phenomenon?
RC - At digital level, while people were more confined, it was nice to go through websites and look at fantastic houses with gardens. There was that increase in demand, but it didn't deserve the publicity or the impact it was given. I'm talking about Portugal. In the high-end segment, those who wanted the luxury flat already wanted it with good balconies, with good views, already wanted a penthouse with a pool. This hasn't changed.
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AC - I would like to hear you talk about customer segmentation, Portuguese and foreign. Over the last year and a half has the willingness to buy outside the major urban centres grown? Closer to the beaches, for example?
RC - The beaches have always been appealing.
AC - Even for a first home?
RC - There was really an increase in demand, almost like a thirst for freedom, for contemplation. But, if it were that much, the interior of the country would have part of its problems solved. Because it has good accessibility, etc. And nothing special has been noted.
PSG - You mean in Portugal. What about other countries?
RC - In other countries, yes. Especially the digital nomads, people very connected to high tech. For example, in the San Francisco Bay Area, the price of houses has dropped a lot. Why? Because companies, in adapting to the economic climate, sent people home. By working from home, people started selling their homes and went more fiscally benevolent states, like Montana. New York State itself, many people stayed in this State but they stopped being in the centre, in Manhattan, and went to the countryside. In a market like the Algarve, which we work actively, and which has a large coastline, there was no more demand for that countryside. The pattern remained the same.
PSG - By the way, how did the market react in the Algarve. The region is being particularly hard hit by the consequences of the pandemic, both from an employment and economic point of view...
RC - The Algarve is going through a terrible time in terms of tourism. There is a lot of unemployment, even though it is quite difficult to recruit people. However, surprisingly, we closed 2020 with higher sales levels than 2019. And this year we have already exceeded the 2020 figures.
PSG - Are we talking about foreigners?
RC - Yes, 99% foreigners. There is something revealing about the Algarve: it has a resident population of foreigners. Even if many of them could not come to Portugal to visit, those that were here, and that already constitute an interesting community, continued actively doing business. And even when recently there was a compulsory quarantine for English people - which meant that in the space of two or three days, 20.000 English people left Faro airport - many people forgot to mention that there were still 6.000 English people flying in.
PSG - That matters, because you work a lot with foreigners. What nationalities are we talking about?
RC - We have to look at the markets in a differentiated way. In the Algarve, 70% of the high end buyers are British. And I'm not including the Scots.
AC - And in Porto, are the customers more French?
RC - In Oporto, it's half, half. Half foreigners, half Portuguese. There are some French clients that fit into our segment, but most stop at 400 thousand euros.
AC - High segment, for a professional, starts from what price reference?
RC - That's the million dollar question. I invented a criteria for myself. Portugal is not New York, where it is considered luxury from five million dollars. My criteria is the 5% of higher value properties that are for sale. So, simplistically, in Oporto we consider the high end of the market from 450 thousand euros. In the Algarve, from 650 thousand euros.
PSG - What's the most expensive house you've ever sold?
RC - At the moment we are negotiating a property with a value of 16 million euros.
PSG - To a foreigner?
RC - Yes.
PSG - Do foreigners pay by cash or by credit?
RC - Usually, 80% of foreigners pay in cash.
PSG - When you said that half of your clients at Porto are Portuguese, does that half pay in cash or on credit?
RC - It has the same pattern, cash.
PSG - There you go, they are very different realities within the same country. We are a very indebted country, but those who have money, really have cash.
RC - Yes, but everything is adjusted to the size, economy and GDP of the country. Whoever is rich in Portugal is not necessarily rich in the USA. There are people who need to resort to credit. Some of these foreigners also need it, but they don't reveal it because they do the financing in their country of origin. It's not that rare.
PSG - There is a thesis, which is not exclusively mine, that has two parts, and I would like you to comment on it: First, house prices in Portugal are not adapted to the average income of the Portuguese. That's why we often talk about a bubble, that is, the difference between price and asset value. But a large part of that price has risen not because of internal demand, because of the Portuguese people's ability to buy, but mainly because of external demand. It's as if the Portuguese buyers were hurt when buying, but benefited when selling. The second part is that, on top of that, the State helps this price formation by giving tax benefits to pensioners from several countries and by creating the gold visas to attract foreign capital. This leads to the sale of assets to foreigners, but has a perverse effect, which is to increase the average price for everyone. And the Portuguese don't have the income for these prices. Do you want to comment?
RC - If foreigners had such a great direct impact on that demand, the Government would not even consider annihilating the Golden Visa, as it has been doing. Then, there is a multiplier effect, which is almost always forgotten. The market is open - and it has to be open! If it wasn't, we would be a dictatorship, a totalitarian regime. When the market is open, whoever buys a house, or invests, will do so for certain reasons.
PSG - Sorry to interrupt you, but in an open market there must be equal rules for all. Foreign pensioners have tax benefits that Portuguese pensioners don't have.
RC - Yes, I would very much like Portuguese retirees to have them. Because if there is one class that cannot be defended, that cannot work more and increase productivity, it is the retired people.
AC - Ricardo, I'm going to agree with you and disagree with Pedro. The arrival of foreign retirees in Portugal does not change the national reality at all. I would even say that it improves it. Foreigners with purchasing power naturally bring advantages to the Portuguese economy.
RC - It's the so-called multiplier effect. When foreigners come to Portugal, they will pay taxes. They will buy a house and pay IMT, stamp duty, create jobs and consume. We have to think that these foreigners are very much related to tourism. If someone visits Portugal and then cannot opt for a more permanent residence in the country, this can be discriminatory. But I understand what Pedro is saying. It is legitimate to think that way up to a certain point. In other words, we are going to give positive discrimination to foreigners, so that they come here. Now, let's look at it another way: what is happening in Europe? A company in Portugal pays 21.5% of IRC; in Ireland it pays 15%. What is this? Tax competitiveness. In Malta there is none of this. In Luxembourg it is better to say nothing. Then there are the Jersey islands. So, countries try, in some way, to create poles of attractiveness. Portugal has some natural aspects: security, the welcome the Portuguese give, the ability of the Portuguese to adapt. The Portuguese make up for their shortcomings (sometimes they do not have a good command of languages) through a splendid effort. We are a people with very interesting characteristics. I see no harm in us creating fiscal or other competitiveness to attract foreigners.
AC - In the absence of other factors, right?
RC - Let's look at the case of Spain. It also has a tax regime that favours the entry of foreigners. It also has the Golden Visa and is only benefiting from that.
AC - You mean legislative instability, what is announced and then corrected?
RC - Yes, nobody reacts well to a climate of uncertainty. Whoever is going to invest, wants security. If things start to change a lot, people don't invest. And there are other fantastic countries. Portugal is the one I like the most, but the truth is that there are alternatives.
PSG - Let's look a little bit into the future. When we look at the property market, what are the determining factors? Is it the end of moratoria, is it the evolution of interest rates...?
RC - This is all conjunctural. Moratoria are going to happen and they are going to have an impact. Some things are going to have to be stretched. The banks are going to swallow some frogs. There are mechanisms that are going to have to be put in place. On the other hand, we can be relatively calm because the European Central Bank is going to have a policy of containing inflation for the next two years. So interest rates will remain relatively low. The cost of money will be low.
PSG - But you were saying that this is cyclical. For you, what factors are structural?
RC - The most important factor of all, and one that is rarely mentioned, is the productivity of our economy. It is low and will continue to be low. There has to be a revolution in mentalities. And there has to be entrepreneurship.
PSG - The most important thing is to increase income?
RC - Yes, to increase income through productivity.
PSG - But you're not optimistic, from what I understand.
RC - I absolutely agree with all the necessary measures to support the bad moments of a professional. I don't agree that it is possible almost ad eternum not to work and have some kind of income. That's surreal, because someone is going to pay for that. If it's not internal taxes, it's going to be external taxes. And that's why sometimes people from Northern Europe complain (without saying they're right). There is one thing that should change: the flexibility in the way people receive their income. I took my degree in Economics and I don't remember them ever talking to us about entrepreneurship. And entrepreneurship is fundamental.
PSG - You have studied mainly the authors of liberal economics...
RC - Yes, Keynes and the others. But the bottom line is: an American relates what he makes to what he earns. In between there is productivity. In Portugal it's not necessarily like that. And that's what's wrong.
PSG - You're talking about the labour market...
RC - Yes. If someone has an unemployment benefit, they have to demonstrate that they are legally looking for a job.
AC - So, now we come to the million euro question: after all, will prices rise or not in the foreseeable future?
RC - I foresee something that is related to all this: the pandemic may be eradicated soon and this difficulty in supplying raw materials will stop. Supplies will be more fluid and there will be more availability to find labour. Prices will sustain themselves with low marginal increments. But we can't make too many policy mistakes, scrap A, change C...
PSG - ... or tax D.
RC - Yes, but the issue is the following: a French client goes to a notary in France and pays 10% tax. In Portugal, that is not the issue. Here it is the uncertainty, the insecurity that people have when they invest.
PSG - When you talk to potential clients interested in investing in Portugal, do they tell you about it?
RC - Of course! We have already lost clients of various nationalities to Spain. And they don't talk anymore, because sometimes they don't even come to us anymore. They make their way and understand the news about Portugal. They think: do you want to put an end to the Golden Visa in a market attacked by the pandemic? The Golden Visa exists in several countries, including London. And hasn't London benefited with financial hubs from this? We cannot have a policy that is not integrated with the rest of the countries. We have to have a fiscal policy of integration, of welcoming, integrated. If not, we lose the advantages. Sometimes, the simple fact of not following the same rules puts us in a situation not of indifference but of competitive disadvantage. And that is what is happening. Fortunately we get some credits, some notoriety, we benefit from some client ignorance and some lawyers try to smooth things over and help. But sometimes you really don't understand this.
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