The housing crisis can be solved with more construction, but it is necessary to ensure that the supply is not excessive to avoid a crisis in the opposite direction, the Governor of the Bank of Portugal (BdP) warned today in the Algarve.
In a lesson with economics students at Vila Real de Santo António secondary school, in the district of Faro, Mário Centeno recalled the times when he studied at the school, told the students that “luck only happens to those who are prepared” and, in response to a student, warned that housing crises can have “devastating” effects on the economy, but need “a long time” to be resolved.
Asked by a 10th grade student about the policies that should be followed to “avoid the exaggerated prices of real estate in Portugal and carry out a real reform in the area of housing”, Centeno recalled the financial crisis of 2008/2009 and the sovereign debt crisis that followed, which had a “strong impact on Portugal” and other European countries.
“[The crisis] had a consequence, and that consequence was – sometimes it’s better not to adjectivize too much, but I’m going to abuse it a bit here, despite the cameras [of the media present] – devastating for the construction sector,” he said, stressing that the result was “more than a decade” with the construction sector in Portugal “practically stagnating”.
The former finance minister recalled the law of supply and demand and pointed out that, in Portugal, “supply was stagnant, new buildings were few, and demand was growing”, although this growth was not influenced by demographic issues, because, without immigration, there would even be less population in the country.
“When prices and the quantity traded go in the same direction, it means that the market is being impacted by forces coming from the demand side. And that’s what’s been happening in Portugal since 20214: the price increases and the quantity traded increases,” he said.
Driven by a growing demand from foreigners, there has been an increase in demand for housing, but “this process is slow” on the supply side, “more than everyone wants”, not allowing for a drop in housing prices, he said.
“I insist, it’s not just in Portugal, it’s all over Europe, and the original reason, in my opinion, is that we exaggerated the response we gave to the financial crisis and the sovereign debt crisis, in the reduction we made to the construction sector,” he said.
As well as taking time to build, “Portugal hasn’t grown in terms of population” and the “structural need for housing hasn’t increased”, said Mário Centeno, pointing out that there are countries at the opposite end of the spectrum, such as China or Japan, “which have the exact opposite crisis” by having a surplus of houses.
“And I can assure you that the worst crisis that can exist in a country is a crisis in the housing market,” he said, stressing that the fall in prices has an impact on the loss in value of real estate and those who borrowed money to buy a house end up “paying a much higher price for the house than it is actually worth”.
“When this happens, and it happened in Europe, in Sweden, in Finland, in the 90s of the last century, this crisis has an enormous destructive capacity in the countries,” he said, considering that the option is to “increase the supply of housing”, but being “very careful not to generate phenomena of oversupply” that would generate another crisis.
