Can the Portuguese economy rely on the Lisbon house price boom?

It is time to head south again and touch base with what is happening in sunny Portugal. In the short-term the UK weather may be competitive but of course in general Portugal wins hands down which is why so many holidaymakers do their bit and indeed best for retail sales and the tourism industry over there. No doubt they helped cushion things when the economy was hit by the double whammy of the credit crunch followed by the Euro area crisis but now the Bank of Portugal was able to report his in its May Bulletin.

In 2017 GDP grew by 2.7%, in real terms, after increasing by 1.6% in the previous year.

This is significant on several levels. The most basic is that growth is happening. Next comes the fact that for Portugal this is a performance quite a bit above par. This is because as regular readers will be aware the background is of an economy that has struggled to maintain economic growth above 1% per annum. It is also means that the statement below has been rather rare.

In Portugal, GDP growth stood close to the
euro area average.

Accordingly the nuance is a type of statement of triumph as not only has Portugal seen absolute economic problems it has been in relative decline. Tucked away in the detail was good news for issues which have plagued the Portuguese economy.

The factors behind the acceleration of the Portuguese economy in 2017 were exports and
investment. This composition of growth is particularly important in correcting a number of
structural problems persisting in the Portuguese economy. The strong performance of Portuguese
exports mostly resulted from a recovery in the pace of growth of external demand for Portuguese
goods and services, in particular from euro area partners.

So the “Euroboom” helped and one part of the story allows the central bank to do a bit of cheerleading.

These developments have a structural dimension, including the closure of firms which are more oriented towards the domestic market and the establishment
and expansion of new firms that export higher value-added goods and are oriented towards more diversified geographical markets than in the past.

However us Brits may well have done our bit for something which is also going well.

In 2017 the market share gain of Portuguese exports was also associated with extraordinary growth in tourism exports. The dynamism observed in the tourism sector in Portugal exceeds that of a number of competing
countries, namely the other countries in Southern Europe.

This issue matters because Portugal has in recent decades been something of a serial offender in terms of finding itself in the hands of the IMF ( International Monetary Fund). A familiar tale of austerity and cut backs then follows which is one of the causes of its economic malaise. The May Bulletin implicitly confirms this.

Bringing the GDP per worker in Portugal closer to the average of European Union (EU) countries is a particularly important challenge for the Portuguese economy.

Indeed and tucked away in the better news on investment is something of a warning.

Construction benefited from favourable financing conditions, an increase in demand from
non-residents and strong growth in tourism and related real estate activities……….This is particularly relevant for an economy such as Portugal, where housing has
a very high share of the capital stock and the level of capital per worker is low compared with
the other European countries.

This brings us to the background of Portugal being a low wage, low productivity and low growth economy. An issue is this way it leads this European league table.

In 2015, Portugal was the country with the largest weight of construction in the stock of fixed
assets, with 91.7% (41.5% associated with dwellings and 50.2% associated with other buildings
and structures)

Unemployment

The better economic situation has led to welcome developments in this area as you might expect. From Portugal Statistics on Friday.

The April 2018 unemployment rate was 7.2%, down 0.3 percentage points (p.p.) from the previous month’s level,
0.7 p.p. from three months before and 2.3 p.p. from the same month of 2017.

This area has been a particular positive as the unemployment rate has gone from a Euro area laggard to one improving the overall average. Whilst in Anglo-saxon and Germanic terms it still looks high for Portugal it is an achievement.

only going back to November 2002 it is
possible to find a rate lower than that.

On a deeper level we learn something from the employment trends. For newer readers in the credit crunch era rises in employment have become a leading indicator for an economy. Looked at like this then there was a change in the summer of 2013 and since then an extra half a million or so Portuguese have found work. Returning to economic theory this is a change as it used to be considered a lagging indicator whereas now we often see it being a leading one.

House Prices

The Bank of Portugal will be pleased to see this and will have its claims of wealth effects ready.

In the first quarter of 2018, the House Price Index (HPI) rose 12.2% in relation to the same quarter of the previous
year, 1.7 percentage points (p.p.) more than in the fourth quarter of 2017. This was the fifth consecutive quarter in
which dwelling prices accelerated

Perhaps this is what they meant by this.

Monetary and financial conditions contributed to this economic momentum, with the ECB’s monetary policy remaining accommodative.

A couple of areas stand out according to Reuters.

The National Statistics Institute said house prices in the Lisbon area rose 18.1 percent in the fourth quarter from a year earlier to an average of 1,262 euros per square meter. In Porto house prices rose 17.6 percent.

So Portugal now has the capital city house price disease. Just under half of recent turnover in houses by value has been in Lisbon. Yet the ordinary first-time buyer is seeing prices move out of reach.

Comment

The new better phase for Portugal is very welcome for what is a delightful country. But beneath the surface there are familiar issues. Let me start with an area that should be benefiting from the house price boom which is the banks.

Nevertheless, NPLs remain at high levels, in turn, weighing on banks’ profitability, funding and capital costs. High NPLs also hinder a more efficient allocation of resources in the corporate sector and thus weaken potential growth.

You may note that the European Central Bank prioritises the banks over the corporate sector as it reminds us that non performing loans remain an issue. Also there is the ongoing problem on how the new  bank Novo Banco went from being perceived as clean to dirty like it was a diesel.

The FT’s Rob Smith has a story today on the latest complication. Novo Banco is planning to push ahead with its bond sale, which involves tendering outstanding senior bonds, despite a new legal challenge from a London-based hedge fund, which argues that it has actually already defaulted on its senior debt. ( FT Aplhaville).

Also there is this pointed out by @WEAYL around ten days ago.

CGD, BCP and Novo Banco lent 100 million to the venture capital company ECS at the end of 2017. The next day they received the same amount in a distribution of the fund’s capital managed by ECS. (Economic Online)

Next comes the issue of demographics of which I get a reminder whenever I go to Stockwell or little Portugal.

The resident population in Portugal at 31 December 2017 was estimated at 10,291,027 persons (18,546 fewer than in
2016). This results in a negative crude rate of total population change of -0.18%, maintaining the trend of population decline, despite its attenuation in comparison to recent years.

Even worse the departed are usually the young, healthy and educated.

Should the trade wars get worse, then there will be an issue for the car industry as it is around 4% of economic output and has been doing well.

7 thoughts on “Can the Portuguese economy rely on the Lisbon house price boom?

  1. Another story of a western economy struggling to achieve real growth and all the policy makers and central bankers can come up with is boosting the housing market so that bilders, speculators, flippers and of course not forgetting the “precious”, can make money.

    In the economies of Spain, Portugal and southern France, theses very properties and new builds are unaffordable to the local population, and are being sold to prosperous northern Europeans, retiring to the sun or escaping the “cultural enrichment” of their cities by deliberate mass uncontrolled immigration, since they have capital(and home equity of course) built up over the decades of REAL economic growth during the 60’s. 70’s and 80’s.

    Ironically this is the very capital that is being destroyed by policies like QE and ZIRP, in nature the parasite rarely destroys the host, but in the west, the banking industry is slowly suffocating the real economy and destroying the wealth and capital through inflation, makes you think it might all be part of some evil plan?

    • Yes Kevin, an interesting perspective, how accumulations for earlier bubbles seek value in “under-priced” markets. A kind of rentier merry-go-round. I think a Europe-wide tax on 2nd and 3rd homes is the only way to quell such activity, a single registry should be possible with the power of the interweb. True overseas(russian) and company owned property is not banned but subject to 10x punitive ownership tax.

      The Establishement would not like such a reality check however, this impoverishment of the masses suits them just fine.

      Paul

      • I know someone who bought two Lisbon central flats for the purpose of AirBnB investment last Autumn. They will judge themselves knowing and savvy portfolio owners….?

        • Yes Barcelona has had a massive problem with Airbnb crowding and pricing out locals catering to the massive tourist demand, they doubled the number of inspectors, as there were an estimated 7,000 illegal properties. That awful word savvy, used in all the property makeover problems, as if there was anything remotely clever about buying a pile of bricks and waiting for the price to go up, but most of those people think they are.

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