The rental market Main Opportunities and Weaknesses facing Owner-occupied Housing Market

Inês Quental e Melo

Abstract

The issue of housing has been very much discussed over the years. Housing Policies implemented were not always successful and accepted by all stakeholders.

Current severe economic crisis throughout the world triggered a higher demand on rental dwellings. Despite the sharp fall of interest rates on mortgages, financial institutions do not see the credits in the same way and therefore housing rental market appear as a second option. In this sense it creates opportunities to boost the rental market making this a solution to inhabit part of the options of the population.

This dissertation includes a literature review on housing policies of the past decades with emphasis on the role of the Public Administration in the rental market, particularly in the rents freezing. Examining the Portuguese housing stock it is possible to see the high number of dwellings and decaying buildings with no housing conditions, due to old contracts with leases out of date. The new legal urban rents framework has brought improvements to the new contracts but continues to be very restrictive in the old contracts, namely, the process of updating rental values is very complex, penalizing the owners and over protecting the tenants even in cases lack of payment

A more focused analysis in the of , based on the issues discussed above, seeks to study the dynamics of existing housing, trying to justify the abandonment of the Central areas and develop strategies to revive the housing market.

Key Words:

Housing

Housing Policies

Owner-occupied housing market

Rental Market

Legal urban rents framework Introduction

The theme of this article focuses on the Rental Market and its potential as an option for seeking residence. The main objective is to understand how the Owner-Occupied Housing Market and the Rental Market may exist in equilibrium, also trying to propose measures to boost rent. This way, this article try´s to characterize Housing Policies in over the past decades, analyzing legal urban rents framework, describing the state of the Portuguese Housing and proposing changes to existing legal urban rents framework in order to make the rental market more attractive.

In the current economic context of deep global crisis, is particularly timely to discuss the relevance of the housing market. Access to owner housing became stronger in 1960 with the expansion of horizontal ownership and ease of mortgages created by the bank Caixa Geral de Depósitos. These facilities were reinforced in 1970 by the extension of housing loans to other banks and the creation of the various legal framework of subsidized credit. These measures encouraged the growth of owner-occupied housing market to the detriment of the rental market, which lost expression over the following decades (Salgueiro, 1992).

Between mid-2008 until now, the values of EURIBOR rate, which serve as a benchmark for loans, fell from record highs to the lowest ever, currently around 2%, although access to housing credit is now more restrictive. This may have led to recent demand for the lease, which in recent months revealed a demand exceeding 50%.

Methodology

In the first part, through a literature search, one elaborates a description of the evolution of the Housing Policies in Portugal, followed by a characterization of the current housing park, data in accordance with collected of the National Institute of Statistics (INE), for Portugal, and of the European Statistics on Housing in 2004, to compare with other countries. Together with the study of the dynamics of rent market and owner-occupied housing market (based on the Book Market Studies nº. 2 that the Associação de Profissionais e Empresas de Mediação Imobiliária em Portugal (APEMIP) launched in 2009) it is possible to make a characterization of the actual Housing Policies and its dynamic.

In the second part, it is proceeded the analysis of the housing park the Lisbon municipality and respective parishes, through data provided by INE, later characterized the dynamics of supply and demand of properties in order to propose amendments to streamline and balancing the housing market, including the rental market.

The followed methodology is defined in the following figure.

Evolution of Housing The Housing Stock in Market Rent and Owner- Policies Portugal Occupied Housing in Portugal

Frame of the issue and current state Analysis Lisbon Municipality

Proposals for changes to dynamise the Rent Market

Figure 1 – Article methodology

Evolution of Housing Policies

The issue of housing in Portugal has been characterized in recent decades, with a strong focus on the acquisition of private housing and the consequent loss of importance of the rental market, which has been dormant. This reality is joined by a strong weight of new construction over rehabilitation. The Housing Policies in Portugal was never a defined and consistent policy. According to existing needs, it has been established measures and programs without a prior study and no certainty of closing. Moreover, the housing policies implemented almost boil down to meeting housing needs of disadvantaged families and insolvent. In this sense, to the full satisfaction of a constitutionally protected right is necessary to move from a "policy of social housing” to a “housing social policy" (Fonseca Ferreira (ed.), 1993).

The rental market has suffered over the decades the consequences associated with a freezing of wages, which made itself felt since 1910. This freeze was to prevent land speculation, and a time when inflation was very low, it was a good option. The problem arises when inflation begins to increase and becomes almost impossible to keep the property. However arose amendments to the legislation but still not getting the expected results.

By the late 50´s the main problems were related to lack of dwellings, poor housing conditions of existing dwellings and the lack of infrastructure and equipment. The dwellings were very small areas and the buildings decayed by the absence of conservation policies.

From the 60´s, the housing shortages became more severe around large cities. This was also due to a policy of industrial expansion that created the supply of unskilled jobs, favouring the rural exodus. In this period the performance of Public Administration in the production of urban land and housing was inadequate, being this trend accentuated with the publication of DL 46673 of 29 November 1965, witch coming to recognize that the private sector was able to meet demand for urban soil. This measure, which could be intended to facilitate the urbanization, caused the growth of neighbourhoods and illegal clusters of tents, and the intensification of land speculation process. (Pardal and Costa Lobo, 2000).

The democratic regime inherited the issues pending from the previous regime, including housing shortages and the proliferation of illegal neighbourhoods and areas occupied by tents. After the revolution of 1974, with the arrival of thousands of returnees from former Portuguese colonies and the return of emigrants, there was an increase in housing needs. In 1976, with the 1st legal framework of mortgage loans and subsequent creation of subsidized loans, the purchase of housing becomes the main choice.

Among the 70´s and 80´s, the excessive population increase in metropolitan areas, a result of rural exodus of the previous decade, led to the shortage of housing increased. This shortage is reflected in almost 40 thousand families living in tents and 195 thousand families to share 87 thousand dwellings on average more than two families per dwelling (Nunes da Silva and Correia, 1988; Paulo, 2008). It was in the 80's that the government intervention in housing had was having less expression, a time when the interest rates on housing credit were much higher than today.

This is the culmination of this journey through national policies for the housing sector. In the 35 years since the 25th of April , this is a path that leads to a temporary residence, with a direct role in providing housing, a Government regulator who advocates the privatization of public housing, and become partners with no means of public functions (Paul, 2008).

Throughout these decades many have been the programs created with the aim of overcoming some problems, these need emphasizing SAAL, RECRIA, PER or PROHABITA. As a summary of the housing policies of recent decades certain conclusions are distinguished:

The Government has resigned from his role as producer of housing (see Chart 1); The construction decreased gradually in recent years. Heavy weight of new construction over rehabilitation. Commitment to the purchase of housing. The number of contracts for housing loans has increased The interest rate EURIBOR reached historic lows. The rental market is conditioned by the limited action to update the old rents, rents there with very low (see Chart 2)

Chart 1 - Dwellings built by public promotion (%) Chart 2 - Distribution of income by age in 2001 (Source: (Source: INE, Statistics Building and Housing) INE, Census of Population and Housing 2001)

The following graph shows the differences between countries in terms of housing construction, noting that Portugal has had an increasing number of dwellings built, as well as and , unlike all other countries.

Chart 3 - Completed dwellings per 1000 inhabitants in 1980, 1990 and 2003 (Source: Housing Statistics in the European Union 2004).

The Portuguese housing stock

The range of dwellings of the last census decade, from 1991 to 2001 was positive, with growth of almost 21%, and on the other hand it had a decrease in the number of non conventional dwellings and collective housing. The age distribution of buildings in Portugal had an inverse behaviour to the EU average, with the least since ancient buildings and more recent buildings - Portugal has about 40% of the buildings after 1981. These buildings, more than half have no need for repair and 3% are in a very run down. For the distribution of households, 79% are owner-occupied housing and the rest are rented dwellings.

The vacant dwellings represent 10.9% of the available dwellings, of these, 6.6% are vacant without apparent reason. These vacant dwellings without apparent reason are most representative of vacant dwellings and are possibly related with the real estate speculation, these are dwellings that are restrained of the market just for this purpose.

Market Rent and Own Housing in Portugal

The referring legislation to the Lease has a new legal framework since 2006, which replaced the one from 1990. The Legal Urban Rents Framework (RAU) in 1990, has brought changes in particular types of contracts, with less protectionism for the tenant and more freedom in the lace, but the problem of pensions frozen was not resolved. The New Legal Urban Rents Framework (NRAU) of 2006 is trying to solve this problem of old rents but the upgrade process is very complex and time-consuming and not suited to all situations, including the insolvency of both sides. Relatively to old contracts, they continue to be detrimental to the landlord in the following cases: transfer to other contract, breach of contract for failure to pay or need, by the landlord of the property for themselves or their children.

The following table shows the evolution of law in private:

Date Event 1910 Republic Day. Publication of the Decree of 12 November 1910, freezing the rents The pretext of the Great War, there is a complete freezing of rents with Decree 1079 of 23 1914 November 1914. Criminal obligation to lease vacant homes for rent on the date of the decree Legislation strengthening the earlier decree and then, in the face of rampant inflation, Until 1929 there is a thawing shy of rents 1943 Decree of 22 January returning to the freezing of rents 1948 Law on tenancy that the rent rises slightly but keeps freezing in Lisbon and Oporto. Study concludes that the rents were between one fifth and one quarter of the value that 1969 would accompany the devaluation of the currency. 1974 Returns the freezing of rents along with the obligation to rent. With the 46/85 Act recognizes for the first time in the history of the lease, the existence of 1985 inflation and allow for slight adjustments to the value of the old rents, with an annual update. 1990 RAU - Legal Urban Rents Framework 2006 NRAU - New Legal Urban Rents Framework Table 1 - Evolution of the rental legislation (Source: LXCASA - Portal das Casas de Lisboa, http://www.lxcasa.com/noticia.php?ref_new=73, accessed 1 October 2009)

The Housing Policies, own housing or lease, are also responsible for the conservation status of the housing stock. The rents freezing has a direct effect on the conservation status of buildings as financially impossible for the owner to carry out maintenance works, legally required by law.

Current Dynamics of Supply and Demand

The characterization of current supply dynamics and demand presented is based on data contained in the Book Market Studies Nº. 2, prepared by the Associação de Profissionais e Empresas de Mediação Imobiliária em Portugal (APEMIP)1 and the Relatório Dinâmica do Mercado written by the Observatório da Habitação e Reabilitação Urbana (OHRU)2, published by the Instituto da Habitação e Reabilitação Urbana (IHRU). Since the studies are based on surveys of real estate it’s not possible to say that the figures are fully representative, but it is believed that in percentage terms are very close to reality, because they are portals for a significant sample.

With regard to the existing housing supply, 81% of the properties are residential properties, with only a small range for the rent, about 3% between flats and houses.

Chart 4 - Range of values for sale of New and Used apartments per m2 for the of Portugal (Source: Book Market Studies Nº. 2, 2009)

The districts of Lisbon and Faro have a value per m2 very similar, and are also the districts with higher values. In the case of Lisbon, this difference may be due to the fact that for the price of the capital and in more remote are quite different. The districts with amplitudes of sales figures may be lower districts where there is so marked heterogeneity among the cities that form them. It should be noted that the districts in the values of rates used are higher than in the new apartments, as is the case of Beja, Évora and Santarém.

The overall supply in the of Lisbon is mostly dedicated to the apartments, almost 70%. As for the types available, the highest percentage is in T2 and T3, representing 71% of existing buildings. The average value per m2 apartment in the district of Lisbon is about 2300€/m2 for new apartments and at least 400€ for the apartments used. The rental values for the municipalities in the are generally higher for the municipalities in the north, especially in Lisbon, and Oeiras. The average values of income, regardless of type, to the North Rim are around 1000€ per month and the south shore, the 700€ monthly.

The distribution of property in Oporto district is similar to the , a large proportion of flats (66%) and a significant level of T2 and T3 with 68% of the existing typologies. The district of Oporto have an average per m2 apartment considerably lower than the district of Lisbon, about less than 600€/m2 in the apartments and spent 520€/m2 in the new. As with rents in the Oporto Metropolitan Area, the counties are the most expensive port and the counties that border it: , Gondomar, Maia and . The other municipalities have similar incomes and significantly lower than those previously.

1 Estudo divulgado na abertura do Salão Imobiliário de Lisboa 2009 que decorreu na Feira Internacional de Lisboa entre os dias 17 e 20 de Setembro. 2 http://www.portaldahabitacao.pt/pt/ohru/estudos/dinamica_mercado.html (accessed September 2009) Regarding the demand of residence, there was a marked change in recent months, when the lease came to have a higher demand compared to the purchase. This is linked with the current economic situation affecting the purchasing power of the Portuguese and at the same time it also has a restrictive effect on the part of the financial system that has become more cautious in granting housing loans. This whole situation has changed the dynamics of demand for the Portuguese, who soon began to seek housing solutions in the lease.

Chart 5 - Search for Residential purpose (Source: Book of Market Studies Nº. 2, 2009)

The Chart 5 represents residential purpose at the country level on the districts of Lisbon and Oporto and its municipalities, where it notes that the lease has always a higher demand with the exception of Oporto. The ten top counties in Portugal in June and July this year, up 52% of total demand, and half belong to Lisbon Metropolitan Area, with approximately 29% of demand, and the other municipalities belong to Oporto Metropolitan Area, with 23% of demand . For types, dwellings T2 and T3 are, in general, the most wanted.

Municipality of Lisbon

To better understand and study the phenomena discussed above, it was decided to do a deeper analysis on a larger scale. For this, the municipality of Lisbon was chosen, for its importance as the capital and also the issue that has been discussed about its abandonment, including the historic center. This fact deserves special attention, to explain the development of various policies and measures to increase the competitiveness of the county to the different segments of demand at the level of housing conditions and in particular the prevailing market values.

The already known abandonment of capital is shown by the decrease of the resident population and the number of private households and buildings. These buildings have an average age of 54 years, with towns with many old buildings and with many other recent buildings, and older buildings are located in the most central parishes. Despite the decline in population, there were four parishes that saw their population increase: , , and Encarnação, where there has been growth in neighborhoods like Telheiras, Alta de Lisboa and Parque das Nações. It has been estimated for the year 2006 that the number of households would had an increase of almost 6 thousand more households, and the average number of inhabitants per property for the municipality of Lisbon is 1.8, therefore making it impossible to conclude whether or not there are cases of under or over stocking.

The sale values of rates prevailing in the capital are usually higher in the city center and it can be said that it is where the dynamism of the market is greater, where historic parishes are located as Bairro Alto, Chiado and Lapa. Regarding the leases this dynamism in the city center is not so marked extending to the north, notably to , , Lumiar, Chelas, and Parque das Nações.

When crossing the cartograms percentages of offer with the prices we observe that in general, the distribution is quite similar, it can be concluded that the most dynamic districts also have higher values, both buying and renting. Having a higher bid may be justified to have higher values than the average increase of parishes.

Relatively to the prices by type, it appears that, naturally have more types of sales value and superior accommodation, should reverse the values per m2 which have higher values for smaller types.

Diagnosis and Proposals

In accordance with the done characterization some fragilities had been previously detected for which if they consider measured that they make possible its improvement.

The main problems that affect the rental market are related to heavy investment in the purchase of private housing and the problems inherited in the various successive freeze rents. These freezes caused the continuous degradation of these properties without any intervention; on the other hand it created a climate of distrust on the owners who were considering on putting their property on the rental market.

The characterization of the state of the Portuguese housing reinforces the existence of buildings in an advanced state of degradation have been found that some of these cases are due to leases that do not provide a financial return sufficient to maintain the buildings. Moreover, urban renewal has a significant, continuing to overlap with new construction.

To try to solve some of these problems the following proposals are presented:

Amendments to NRAU Updating IMI Property should be gradual, phased associated with updating the income;

Where the level of conservation of the property was equal to 1 or 2 (in which case it does not give an update of income), and is proven to lack of capital of the landlord to carry out the works, the Government Update Old will assume responsibility for rehabilitation of that property, which was the result of policy measures to freeze rents; Lace Just as the update has a maximum annual limit that if exceeded increases the refresh period in order to supplement income to date, you should also provide for a minimum value for the same annual updates and case would not reach this value, the value would be to the minimum and in turn the refresh period would be lower. The transmission must be made only to family members who can prove they have with the tenant for a Transmission minimum of 3 years, for example, so try to avoid cases of family members who will occupy the house for of the old the sole purpose of "inherit" the lease;

contract If the individual concerned has a property with the minimum conditions of habitability, you can not inherit the lease and if you want, should be made a new lease with a new income, where you can exercise your right of first refusal. Amendments to NRAU

Termination If the tenant does not pay the rent, it is for the landlord to decide which period is acceptable to wait for of current payment, and if it does not take place, the owner is fully entitled to carry out the eviction. Like a bank loan, contract in case of failure, the decision maker is the bank in question. Table 2 - Proposed Amendments to NRAU.

For regeneration and taking into account the dynamism of the higher market that was identified as being at the heart of Lisbon, it was important that these areas if it acted initially at urban regeneration and analyze the cases of old rents if limit (insolvency of both parties). It is suggested, in particular, more in-depth solutions for buildings in poor condition and whose owners have not resources for rehabilitation. In these cases, the Government could be responsible for rehabilitating the building and then place it would be the rental market. The proceeds from such property would revert to the Government and the owners would receive a value on your property. Act as if the property is transformed into action and the owner would receive a monthly amount for these actions. When the Government to recover the amount spent on rehabilitation of the property, this would return in full to the owner.

Conclusions

The Housing Policies in Portugal have been aimed at solving problems and not trying to create measures that avoid the appearance of these same problems. The Government has been more directed towards social housing, including through the creation of programs and measures for the eradication of tents and resettlement of families in these conditions. With regard to the rental market, the freezing of rents started in 1910 has not been resolved and still has repercussions, especially in the state of degradation results in such conditions the lease. The state of the housing Portuguese reinforces the previous statement, when it found that more than 40% of the buildings has need of repairs.

Relatively to the programs of eradication of the tents it can be affirmed that they had been positive in the measure where the number of not classic dwellings has come to diminish not arriving, currently, 1% of the existing dwellings. On the other hand, the degraded dwellings without habitability conditions had been degrading still more without great interventions for part of the Government. The vacant dwellings are another preoccupying factor since they represent 7% of the existing property almost, being European Portugal slightly above average.

Over time, the existing legislation for the Urban Lease has not been able to truly solve the problems associated with freezing of rents for the month and contracts fairly strict and limiting the rights of the owner on your property. The New Legal Framewok for Urban Lease brings benefits to the contracts under the scheme as it enables a wider negotiation among the parties involved, both in terms of the contract as income, with no over-protection of the tenant rather than owner property. As regards the failure to pay, the legislation is still very soft with the tenant leaving the owner with the risks and found themselves obliged to have their homes "down" with a tenant does not pay the rent, this may take place until about seven months to be able to make the dump.

As for the old contracts with outdated incomes, the new regime created a complex process that involves updating the availability of capital by the owner, even before you see your income to date. In addition to the complex process of rent, there are cases of transmission of contract and termination unresolved for these old contracts, which continue to benefit the tenant.

The capital of the country is a county with population of noncompliance despite the SWOT analysis show several advantages as a place to live, including proximity to services, commerce and community facilities. The main disadvantage associated concerns with the values of sale and rent charged, it is difficult to achieve a wide range of population, but is limited to families with higher incomes. In this study, the county has demonstrated a greater dynamic in the city center or point of view of dwellings that lease. This dynamism is demonstrated by the existing supply and the prices charged, concluding that the most dynamic parishes have the highest values.

At this stage, where the rental market has increased demand, it would be a good opportunity to involve lease to regeneration and thus revitalize the market that can be creating your own space in the housing market.

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