In the past few years, the Portuguese mortgage market has been characterised by stable demand sustained by macroeconomic, social, demographic and legal factors. These factors guaranteed limited exposure to the turmoil in international mortgage security markets that started in the summer of 2007. Mortgage lending continues to play a significant role in overall banking activity on the one hand, and constitutes an important means to retain customer loyalty on the other hand.
By contrast with what has happened in Spain and the UK, Portugal’s mortgage credit market did not suffer from a bubble in house prices. House prices enjoyed a moderate rise of 1.3% in 2007 and annual increases were never higher than 2% in the past five years. At the same time, official construction permits for new homes have diminished by 13.1% in a two-year period, although an abrupt reduction of housing construction or housing value in 2008 is not expected.
Interest rate impact
Even so, the increase of mortgage loan interest rates in the past two years has affected new mortgage origination negatively. The six-month European interbank rate (Euribor) increased from 2.99% in March 2006 to 4.73% in March 2008. As a result, the average value of monthly mortgage repayment instalments rose 29%, from €288 to €372, increasing the burden on household accounts. However, the percentage of doubtful loans remains reasonably stable, never exceeding 1.65% in the past five years and even registering a decrease from 1.54% in February 2003 to 1.29% in February this year.
Recent trends
The international financial crisis is not having the same impact in Portugal that it has had in other countries, except for the shortage of liquidity in the market and the increase of repayment instalments. These factors have led to two discernible trends during the past 12 months. First, there has been an increased differential between the interest rate of new mortgages and the six-month Euribor, from 0.41% in March 2007 to 0.65% in March 2008. Second, the average outstanding capital of mortgages has fallen slightly, from €88,094 to €87,203, according to data produced by the Portuguese National Institute of Statistics (INE).
For their part, banking institutions have adapted the range of products offered to the client base to find the most adequate ways of overcoming the implications of higher interest rates, namely by increasing the tenor of the mortgage loans and by creating fixed rate or fixed instalment solutions.
Moreover, legal changes embodied in law 51/2007, passed in March 2007, have generated a new, more dynamic and competitive mortgage market. The reduction of the pre-payment penalty to 0.5%, the continuous flexibility of mortgage supply and the growing use
of marketing campaigns allowed the renegotiation of the mortgage clauses and consequent loan transfers between credit institutions. Therefore, in recent months there has been a notable growth of loan transfers between banking institutions, which has been driving a convergence of the interest rates on older mortgages and on newly originated mortgages to average 5.59% and 5.37%, respectively, in March 2008, according to INE data.
Market drivers
The Portuguese mortgage loan market also benefited from urban rental market stagnation through the past two decades, which was the result of restrictive legislation. The reduced importance of the rental market consolidated the trend toward permanent housing purchase and therefore encouraged the mortgage business. An increase of the divorce rate from 1.8 per 1000 in 2001 to 2.2 per 1000 in 2006 has also contributed to market growth as the higher break-up of family units causes increased demand for new housing.
Another aspect that contributes to mortgage growth is the dynamic net immigration level, which has risen significantly in the past five years. In 2006, there were 62,332 requests for residency from immigrants, compared with just 19,135 in 2001, further boosting demand in the housing market.
Stable growth
In this context, the mortgage market grew in a controlled and stable way in the past five years, increasing from €65.6bn in February 2003 to €102.1bn in February 2008 – an annual average growth of 11.1%. Solid forecasts for economic fundamentals will allow improved consumer sentiment, which is a necessary condition to the growth of the mortgage market. In particular, the European Commission forecasts a decrease in unemployment to 7.9% this year, together with Portuguese gross domestic product growth of 1.7%, indicating a convergence of local wealth levels toward the eurozone average for the first time in the past seven years.
Any analysis of the future development of the mortgage market must also consider an important asset that is expected to drive the housing market in Portugal: residential tourism. Major national projects are expected to encourage the purchase of holiday homes by both foreign and Portuguese tourists, totalling 600,000 properties over the next 10 years, which will represent a business volume of €90bn.
Although these factors point to good growth opportunities, market concentration is expected to remain relatively high. In December 2007, the combined mortgage lending market share of Caixa Geral de Depósitos and the second largest Portuguese bank amounted to a total of 53% of Portugal’s mortgage volume, corresponding to €53.3bn. Overall, the five leading banks in the mortgage loan business accounted for 91% of the total market in 2007.
Dr Paolo Sousa is general manager of the mortgage and real estate department at Caixa Geral de Depósitos.CHART1: PORTUGUESE MORTGAGE MARKET GROWTH