Expectations of lower interest rates and tight supply are boosting housing square footage

Bank housing valuations rose again in December, snapping two straight months of decline as the market began to digest expectations of interest rate cuts by the European Central Bank in the first half of the year. On the other hand, the economy's inability to increase supply causes prices to adjust, causing prices to continue to rise, experts explain.

The square meter in housing rose by six euros in December last year, reaching 1,536 euros, halting two consecutive months of decline in the index. The increase was almost in all parts of the country, with the exception of the Azores region, and mainly reflects two effects, explains Paolo Caedo, president of the Association of Real Estate Professionals and Companies (APEMIP): lack of supply and growth. And expectations of normalization of monetary policy soon.

The sector representative states that supply has remained practically constant, without any major jump, despite “increasing demand.” The result is predictable – the price is adjusted and therefore rises again.

“When we have several entities competing for the same solution, the tendency is for the price to rise, as a result of this competition. This is very fundamental. We have not seen any change in these flows,” explains Paolo Caedo.

On the other hand, declining inflation and fears of recession have made the market increasingly bet on a cut in interest rates in the euro area even before the summer, a possibility that President Lagarde herself did not rule out in her statements on the crisis. Last month. Vera Gouveia Barros, an economist specializing in the field of housing, outlines here some of the impact of this forecast on the national real estate sector.

The economist says the rise in December “reflects some dynamism in the market, which has already begun to introduce part of the European Central Bank's interest rate cuts.” However, “this premise is already incorporated into Euribor rates, which are in fact those relevant to granting credit.”

“If there is an expectation of a reduction in interest rates, I think this will translate into an increase in confidence in the face of new acquisitions,” Paolo Caedo predicted for the first half of this year, thus speaking of the “good outlook” for the sector.

Data released by INE this Monday show a 5.3% year-on-year increase, just below the 5.6% recorded in November. Madeira recorded the largest increase compared to the same month of the previous year, at 15.5%, while Lisbon topped the series analysis with an increase of 2.1%.

Wealth Effect Vs. Effect of exclusion

But there is another phenomenon that should be highlighted: the wealth effect of rising housing prices. Since real estate is the main asset for families, an increase in its value also translates into an increase in wealth, reducing the need for financing when purchasing another property.

“This alone justifies the fact that in 2023, the residential market transacted around 28 billion euros and banks financed just over 50%. It is not because people have money saved. It is not so, because the main leverage in the residential real estate sector comes from profits from the sale of homes.” “, explains the President of APEMIP. He adds that last year, “92% of homes sold were used.”

Thus, the problem in housing is mainly related to the “exclusion effect” for those who are not yet on the market, i.e. those who want to buy their first home. For families who already own a home, “the financial allocations have never been as great as they are at this moment.”

According to the INE Institute, in 2023, the average assessed value reached €1,521 per square metre, representing an 8.6% increase compared to the previous year.