This is the market commentary regarding the credit crunch and how it has affected the Algarve market. This report was written in October 2008.
Algarve property market remains sound
It is important to remember that living in the Algarve can be akin to living in a bubble. Many momentous events seem to pass us by and we carry on without a care in the world. However, even here all normal topics of conversation have been swamped in recent months by the on-going developments in the global credit crunch. The financial crisis has filtered down and we too are feeling the effects.
There has been much confusion about exactly what the credit crunch is. In very simple terms, it is a reluctance of the banks to lend money. The reasons behind the reluctance or inability of the banks to continue lending is a long and complicated one, but financial institutions have had to adjust their attitudes to risk and reduce their lending accordingly. What seems like a fairly basic issue has had the effect of a financial tidal wave.
The mortgage market in the Algarve has always been very conservative, with risky products such as self-certification mortgages very hard to come by. Mortgages for anything close to 90% of the value of a property are never easy to organise. Mortgages have been mainly granted here on the basis of ability to pay, rather than complicated (and frankly nonsensical) calculations involving multiples of gross salaries and such like. Although it is fair to say that the banks here are now more cautious than they were this time last year, they are certainly more flexible than when I applied for my first mortgage six years ago.
The current problem is more a lack of confidence on the part of potential purchasers, coupled with the natural human tendency to wait and see what everyone else is doing and then follow suit. Whilst there is some logic in this, it never worked very well as a life-plan for lemmings.
In the Algarve marketplace we are generally dealing with the luxury purchase of a second home rather than an essential home. There is a market for primary habitation here but it is simply not a large part of our business.
Ultimately, when someone desires something but has the ability to wait in the belief that the benefits of waiting outweigh the disadvantages, that person will hold on unless something tips the balance in favour of taking action immediately. This limbo period is a simplified explanation of how the property market is currently behaving in the Algarve.
It is no secret that the Algarve is, generally, not a cheap destination. We have excellent and improving infrastructures, a wonderful cultural entertainment programme, countless local events and, of course, the weather, the beaches and the golf venues.
All of this, coupled with high demand, has resulted in property here appreciating steadily, with an average increase of 7% a year over the last 25 years or so.
With the credit crunch, there were fears in some quarters that the market would crash, property prices would come tumbling down and many people would be facing negative equity. But that's not quite what has happened.
Yes, many properties have been reduced in price, but only because the vendors are being more realistic and less speculative, or as a result of the owners desire/need to sell within a given time frame, or because there is over supply of certain types of property.
Properties that are in plentiful supply, especially holiday apartments, are suffering much more in the current market than those that are hard to find. Unique, well located, well constructed quality properties are still in demand.
There are undoubtedly fewer buyers out there now than before, but the vendors remain optimistic and there are historical and logical reasons for this. The Algarve property market has always been slow, with properties sometimes taking months or years to sell. The fact that the present international problems will slow the whole process down further is not a great shock to many people, as they never expected to sell their house quickly anyway.
Many vendors here either live permanent in the house they are selling or occupy it as a second home. Either way it is available to them whilst it is on the market. We are also seeing many owners now deciding to rent their properties to mitigate ongoing expenses. Long-term rentals are always in demand and rentals during the peak periods, which are not just restricted to the summer months, have always produced a good income.
Should I buy in the Algarve now or wait? is a question on many clients’ lips. This depends very much on your personal situation. If you are looking for a particular property and you have funds in place or the capacity to take a mortgage, then keep looking and buy whilst the market is not booming.
If you need a very high level of finance, before you even start looking at property talk to a mortgage broker or a local bank to see if you can obtain a mortgage at this troubled time.
If you want a holiday property or rental investment and you are flexible about the type and location, then look around and find yourself a good deal.
Another frequent question: Does the Algarve remain a good option for investment and as a holiday destination? Unlike many of the emerging regions, particularly those in Eastern Europe, the Algarve has had lots of experience as a holiday destination. We have established international and national transport links and a high flow of visitors. Many of the ‘new’ destinations have seen phenomenal increases in the value of property, but this has been quickly followed by enormous drops in property value as the market has weakened.
As less people want to travel to these destinations, many airlines are reducing the number of flights or cancelling routes entirely, making affordable travel difficult. These are problems that the Algarve does not have. With the Portuguese Government and the regional tourist board aiming to promote the Algarve as a year-round destination, its appeal is widening.
The region has benefited over the last decades from a massive influx of investment, and the income this has created for local authorities is being used not just for physical improvements but also for funding for cultural events and entertainment.
We have a region which has an existing reputation and market, a constant drive for quality and a controlled development plan. Add all this to the natural environment we are blessed with, and there cannot be many better destinations such a short, direct flight away from the United Kingdom and Ireland.
When you look at the growth in the Algarve property market, the average increase is about 7% per year. This is not a headline making increase, particularly when new, cheaper destinations have claimed 40% in a year, but it has proved to be a steady and sustainable increase. And in these turbulent times, it is surely better to be the tortoise than the hare.
