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Algarve Property News: Algarve Property Market 2009 in review

Date: 18/1/2010

There is no doubt that 2009, like it´s sibling 2008, was a strange year in the property market in the Algarve. On reflection, one of the main issues was the fact that no-one could agree what the market was doing, when and why. With the benefit of hindsight we can review the facts, and consider what actually happened, from our (first hand) viewpoint. One of the key problems is information. On one hand accurate historical date is very hard to obtain in Portugal, as, until recently, many of the prices registered for the sale of properties were inaccurate.

Add to this the fact that many offshore property transfers were not even registered here, and it can be seen that the data available was worthless.

The other problem with information was that there was simply too much of it, and much of it inaccurate or misleading. With the average person receiving information from social media sources such as Digg, Twitter and Facebook, plus the printed media and the internet based information resources, TV and radio, it can be seen that it is easy to achieve information overload. The weather forecast is a good illustration of the problem. If I want to know what the weather will be like in Portugal, I can follow a weather feed on Twitter, look at the BBC website, refer to meteo.pt, listen to the local radio and I will probably look at an international site such as weather.com. I will be faced with different, sometimes conflicting information from each of these sources, so I have to assess and filter this to establish which is correct. If out of these 5 sources, 3 say it is going to snow tomorrow, I may believe them, even though I think it is impossible.

Because the credit crunch was such big news, consumers had it rammed down their throat, morning, noon and night. In a country such as Portugal, where small stories such as a bank robbery that netted €1.000 are headline news, big stories are incessantly repeated and debated. So, we all became obsessed with the credit crunch.

There is no denying that the property market here was affected, but we need to look closely at how it was affected, and, more importantly, why? Within Portugal, there are many unique areas of real estate. The Algarve is a good example of this, as are the big metropolitan centres such as Lisbon and Porto. The Alentejo also has its own sub-market, but for different reasons. This distinction is important, as the property market was affected in varying ways, depending on the geographical area, and type of property.

If we consider the Algarve, and simplify things somewhat, we can divide the market up into sections, as follows:

* Primary habitation, normally purpose built apartments
* Habitation with a related commercial activity (e.g. agriculture)
* Holiday accommodation for the "bulk" market, apartments and townhouses, normally in coastal areas within closed condominiums
* Second homes, either in urban

Each sector of the market has behaved differently, and a large proportion of this behaviour is due to basic economic principles. In two particular sectors of the market, where volume of sales has been traditionally high, and supply and demand have been well balanced previously, the effects of the slow market have been felt hard. These sectors are the bulk holiday accommodation, and primary habitation parts of the market.

As demand has been reduced by the well documented effects of the recent years economic troubles, over supply quickly became a reality. In these parts of the market (and any others where supply vastly exceeds demand) the market was, and still is, weak. The reluctance of banks to lend to clients in these sectors, or at least to lend to the level they had previously, compounded the problem.

If we consider the second home market, the situation is, not surprisingly, different. The supply of this type of property is restricted, as a result of a number of factors. Building is well controlled now in Portugal, and the process of getting a construction project is slow. Clients for this type of house tend to have very particular requirements, reducing the suitable number of properties available. Add these factors together, and it is clear that the market will never be flooded at any one time with new properties, thus controlling the supply.

Even during these leaner times, there is continued demand for this type of property (albeit at a lower level than previous years). The net result is that there are few bargains in this sector of the market. Of course, some owners have to sell as their personal situation dictates this, but in our experience these are not the norm. The general tendency is to be more flexible, and external factors such as the exchange rate do play a part.

In summary, we have a sub-market (the Algarve), which behaves differently to the rest of the country, and sectors within this market that are also affected in different ways.

Some facts
As we have mentioned, facts are few and far between in relation to the Portuguese property market, but we do have some information available.

If we examine the information shown on the following website http://www.globalpropertyguide.com/real-estate-house-prices/P#portugal (which is extracted from Portugal´s national statistics), we can conclude as follows:

* Average house prices have shown a positive trend throughout 2009
* The average bank evaluation of a property was higher at the end of the third quarter of 2009, than at the start of 2009
* Bank evaluations have returned to a similar value seen in 2004
* Bank evaluations peaked at around 1.250€/m2 in 2007, and they are currently around 1.160€/m2, a difference of 7%

With the caveat that this is an overview of the entire country, it seems to indicate a stable, slow moving market that has regressed to previous levels, but not in an overly dramatic way. Compare this to countries such as Latvia and Lithuania (which were promoted as fantastic investments recently) where prices have dropped up to 65% in the last 2 years, and this reinforces the point. (Info here: http://www.globalpropertyguide.com/real-estate-house-prices/L)

We should also consider the effect the exchange rate has had on the Algarve property market during 2009. Buyers from the UK still make up the majority of purchasers here, so this is a key factor.

At the time of writing the exchange rate is around 1.12, compared to 1.06 at the end of 2008, a difference of some 5%. This does make a difference, and in many cases those returning to the UK are factoring in the increased buying power their euros currently have in the UK, and adjusting the prices of their properties accordingly. It should be emphasised that this is only relevant to a very small sector of the market

Summary: What really happened?

To conclude, we can say the following:

* Sectors of the property market where supply and demand was unbalanced as a result of the economic climate have suffered the most.
* External factors such as the exchange rate, and banks lending policies have reduced market confidence overall
* Some sectors of the market have fared better than others, and whilst there are opportunities to purchase property at reduced prices in these sectors, it is not the norm
* The high land cost, restrictive building legislation and relatively high construction costs have combined to ensure strong residual value in many types of property

Importantly, we can see that the Algarve has continued it´s tendency to be one of the tortoises within the European property market. Slow, steady growth has resulted in a much slower decline than in some of the hares in Europe, who have seen drastic declines. Source: AlgarveMais

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