Ignacio de la Torre, Chief Economist at Spanish investment bank Arcano, discussed ‘Why Portuguese and Spanish real estate markets will keep rising’ at an event organised by the Portuguese Association of Real Estate Investors and Developers (APPII) recently and dismissed fears of another looming recession or property bubble in the Iberian Peninsula. Both Portugal and Spain are in a stronger, more balanced situation financially concerning their housing markets than many other countries worldwide. Why? Because both countries are not relying on foreign loans.
The Iberian market
Ignacio de la Torre says that when looking Portugal and Spain’s housing markets, many people focus on the returns and how much property goes up. Too often, they forget about the associated risks with returns.
“If you compare both markets before the crisis, house prices were rising sharply but didn’t factor in the risks. Both countries’ systems were servicing huge current account deficits and relied on a lot of debt versus GDP. When you rely on debt over GDP, sooner or later you will create a big problem,” he says.
Looking at both markets today, they are growing in line with available income. In Portugal, wages are growing at around 3% while in Spain at 2.2%, with employment growth at 1% in Portugal and 2% in Spain.
“Risks are critical. Both Portugal and Spain, for the first time in 40 years, are enjoying an equilibrium in their current account balances. We are not building houses relying on German loans. If you analyse how much the total debt-to-GDP growth ratio is, nominally speaking (families + corporations), we have healthy growth (above 1% is dangerous; both were at 3% by 2006). Today both Portugal and Spain have an intensity below 0% which is very healthy,” says the economist.
De la Torre stresses that people and investors are now looking to finance their investments from savings rather than relying on foreign funding. Looking at the private sector in both Spain and Portugal, both corporations and families are saving. The total amount of leverage is coming down, which is healthy.
Long real estate cycle
Ignacio de la Torre predicts that the real estate cycle in both Spain and Portugal will be a long one – longer than the traditional 12-year cycle.
“Today, the reality is size matters when it comes to securing cheaper finance. When you study the development markets in France, Germany and the UK where five firms have 50% of the market share, in Portugal and Spain it is the other way around, with only 5-6% held by the big players. That was ok when you had banks supporting the development market. Now they don’t and consolidation of development companies is inevitable,” says the Arcano economist.
The answer to financing is issuing bonds in order to secure the money where the banks are no longer in a position to do so; and in order to issue bonds, a company needs scale. This leads to partnerships, mergers and consolidation. (...)
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