Opinion article for Visão: Inflation at historical highs: what impact will it have on real estate?

Bruno de Carvalho Matos, Alumnus of the Lisbon MBA and Senior Civil Engineer MRICS PMP MSc wrote an article for the magazine Visão sharing his insights on inflation and its impact on the real estate sector.
The Lisbon MBA Alumnus explains why Portugal was recently highlighted as one of the OECD countries most at risk of a housing bubble, even with a relatively controlled loan-to-value ratio.
Better expectations were created for sustained growth in the sector in the coming years due to a boost in private and public investment. However, with the pandemic in 2020 and the war in Ukraine in 2022, several impactful challenges for the economic activity have come, with the deficit caused in the production and supply chains of raw materials (e.g., for food and building materials) and energy (e.g., electricity and natural gas).
This reality, although part of a structural nature as is the case of the energy crisis, also considering a more optimistic evolution of the market, compared to what was expected due to the pandemic, ended up generating, in a systematic way, an excessive imbalance between demand (high) and supply (reduced), thus leading to a sharp generalized rise in the prices of goods and services (inflation), which, in the Eurozone and in Portugal, has already reached an all-time high of 9% (against the desirable 2%) – that is, compared to the same period last year, goods and services are 9% more expensive.
In real estate, until recently, the greater ease of housing credit and the increase in savings, combined with the difficulty in building and rehabilitating more and cheaply due to licensing issues (lengthy processes) and investment costs (high construction, tax, and bureaucratic costs), has legitimized a global trend of growth in house prices, due to the high deficit of supply in relation to demand. Due to inflation, which tends to reduce the capacity of families, and the change in financing conditions, it is believed that this growth may slow down in the medium/long term, particularly in the medium/low segment, given that the medium/long high tends to be driven by foreigners with high purchasing power, and the number of transactions decreases.
Strongly promoting industrial and energy production is among the measures that should be taken to combat, in the medium/long term, the structural share of inflation, together with the reduction of public and private indebtedness to reduce the level of exposure and mitigate its adverse effects on the economy.
The history of several countries, including Portugal, shows that periods of growth with rampant inflation, tentatively fought with severe policies, are likely to be followed by periods of economic recession, despite there always being someone saying that “this time, it’s different.” The question that arises is whether, this time, will it really be different and to what extent, for better or for worse?
Read the full article (original) in Portuguese here.
Source: Visão