RMBS: Portuguese House Prices Not in "Bubble", but in "Ceiling" Territory

This commentary analyses recent house price dynamics in Portugal compared with the Euro Area, evaluating the latest data and specific factors inherent to the Portuguese case that may help to determine if its house prices are in “bubble” territory. We also provide an overview of potential implications for residential mortgage-backed securities (RMBS) and covered bonds backed by Portuguese collateral.

Summary highlights include:
-- According to the Eurostat, in the third quarter of 2023, the house price index fell by 2.1% in the Euro Area and by 1.0% in the European Union compared with the same quarter in the previous year, while it grew by 7.6% in Portugal.
-- The sharp increase in residential mortgage rates has led to a corresponding drop in mortgage demand as buying a home has become increasingly unaffordable. However, recent data shows an increase in mortgage demand, which is consistent with the stabilisation in interest rates.
-- Historically low levels of new construction, higher construction costs, a relatively more affordable market in the broader European context, and an increased foreign interest in Portugal also affect Portuguese house prices.

“The chronic shortage of housing, a low unemployment rate, and increase in net migration make the prospect of a sudden property price decrease less probable in Portugal, which makes us believe that prices are not in a ‘bubble’ but likely reaching a ‘ceiling’. This should continue contributing to the stable performance in Portuguese collateral backing RMBS and covered bond transactions”. In the medium term however, dynamics could change. This will depend on inflation remaining under control, leading to a stabilisation in interest rates and the current economic slowdown, particularly in the Euro Area, being relatively short lived”, said André Soutinho, Senior Analyst of European RMBS at Morningstar DBRS.