The latest (1H 2019) Mortgage Market Index for Portugal & Spain by Fitch Ratings has revealed that housing affordability in Portugal and Spain has weakened further as younger borrowers struggle to save for deposits.
Fitch Ratings says in the new report that these affordability constraints will slow the rate of house price index (HPI) appreciation in 2020, but continuing supply shortages in major cities and demand from property investors will keep prices slowly rising.
Residential mortgage performance remains strong in both countries, with mortgage arrears stable and at historical lows. This is being supported by low Eurozone interest rates, economic expansion and falling unemployment.
However, a majority of younger workers are still on temporary contracts, which combined with rising rents makes saving for deposits difficult. Home ownership rates have fallen among those on lower incomes as potential first-time buyers have been priced out.
House prices peak in some districts
Property prices in Portugal and Spain are up by 129% and 82%, respectively, compared to the peak prices before the crisis, according to Fitch. HPI growth is influenced by large cities’ real estate trends and is expected to continue increasing, albeit at a slower pace.
HPI increases are influenced by foreign buyers and scarcity of properties. Foreign demand was around 8% and 12% of all property sales in Portugal and Spain in 2018 and 1H19, respectively, according to INE Portugal and the Spanish Property Registry.
Fitch expects home ownership to further decrease in Spain and Portugal as house price increases will continue to outpace salary gains. Low-income families are finding it harder to own a house than in previous years. It will be especially hard for first-time buyers with limited saving capacity as they are affected by rising rents.
The report states: “Access to housing is more challenging in larger cities such as Porto, Lisbon, Barcelona and Madrid where the presence of foreign and institutional buyers looking for rental returns combined with the limited supply of properties have significantly driven up house prices and rental costs. HPI trends by neighbourhood show demand has started to shift towards non-prime areas, signalling market saturation in the most expensive districts and supporting our view of HPI softening in the next few years.
“Investor demand of residential real estate is expected to decrease in Spain given the new rental law (Law 7/2019 of March), which sets stricter conditions for landlords such as longer tenancy periods and restrictions for short-term rentals. In Portugal, it is expected to continue at current levels given the favourable market conditions.”
