Housing Affordability, Public Policy and Economic Dynamics: An Analysis of the City of Lisbon

Round 1

Reviewer 1 Report

Dear authors, I enjoyed reading your article. I would recommend complementing your article with two additional policy-relevant references. I am neither an author, coauthor, nor do I know personally the authors of the two references that I am suggesting, therefore I have no personal interest in this.

My first suggested reference is the Bank of Portugal's most recent policy report of the residential market in Portugal, the factors affecting its dynamics and the foreign investment in this market: Relatório de Estabilidade Financeira - Junho 2022 (bportugal.pt)

My second reference is the excellent discussion in the ECO-SAPO press journal by Carlos Guimaraes Pinto and Goncalo Cordeiro of the Portuguese residential market and its dynamic developments: Os 4 Ds para resolver o problema da habitação – ECO (sapo.pt). Perhaps you can contact the two authors and inquire if they have an academic or more complete version of their article. 

Kind regards,

Author Response

Housing affordability, public policy and economic dynamics: an analysis to the city of Lisbon

Reviewer 1

1. Dear authors, I enjoyed reading your article. I would recommend complementing your article with two additional policy-relevant references. I am neither an author, coauthor, nor do I know personally the authors of the two references that I am suggesting, therefore I have no personal interest in this.

My first suggested reference is the Bank of Portugal's most recent policy report of the residential market in Portugal, the factors affecting its dynamics and the foreign investment in this market: Relatório de Estabilidade Financeira - Junho 2022 (bportugal.pt)

My second reference is the excellent discussion in the ECO-SAPO press journal by Carlos Guimaraes Pinto and Goncalo Cordeiro of the Portuguese residential market and its dynamic developments: Os 4 Ds para resolver o problema da habitação – ECO (sapo.pt). Perhaps you can contact the two authors and inquire if they have an academic or more complete version of their article.

Kind regards,

Reply:

Thanks you for your comments. We have added the following reference to the text:

Bank of Portugal (BdP) (2022) Report on financial stability: June 2022 (originally in Portuguese: Relatório de Estabilidade Financeira: Junho 2022). Banco do Portugal. Available at: https://www.bportugal.pt/sites/default/files/anexos/pdf-boletim/ref_06_2022_pt.pdf (last visited November 11th 2022)

According to the latest financial stability report by the Bank of Portugal (BdP 2022), the real estate market shows signs of being overheating which it is especially concerning given an increase in home loans and the fact that 90% of mortgages have a variable interest rate. We have also added a reference to Bank of Portugal’s report concerning the opening of “doors to foreign investment in the housing market through tax incentives”.

Regarding the ECO-SAPO discussion, please note that we have taken it into consideration however, given that we did not find any academic version of this article, if have chosen not to included it in our paper.

Reviewer 2 Report

Dear authors,

I have read through the manuscript with great interests, because housing affordability is a major urban issue. This study examines housing affordability issues in Lisbon from 2004 to 2019--a period punctuated by both the global financial and the European debt crises. The crises had led to lower income and housing prices in Portugal. The prices have recovered since 2014, even though income has not increased at the same level. Consequently, the authors suggest that housing has become less affordable. In this study, the key dependent variable is RDHR (Housing Expenditure to Income Racio). Results show a greater influence of factors such as tourism, the foreign population with resident status, the propagation of short-term rentals.

Although this paper covers an important issue and the results are potentially interesting, I have serious concerns:

1. How is the boundary and the population of Lisbon determined? Is it based on the municipality of Lisbon? Has the boundary changed over time? Based on the statistics that I see, the population of Lisbon has not significantly increased. The overall population in Portugal was 8.7 million in 1970 and 10.3 million in 2020. In contrast, according to INE, Lisbon had a population of 769,044 in 1970, 564,657 in 2001, and 544,851 in 2021. 

2. How is "the commoditization of the investment in real estate" defined in the Portugal context? Some statistics and references might help. 

3. The housing prices bottomed in Lisbon around 2014 and increased afterwards. Does this reflect a return to "normalcy"? 

4. I do not see an analysis of “the variations on affordability in Lisbon.”

5. I want to see a summary table for the data. I need to see what variables are included in both the standard and the stepwise models. What is the size of “Foreign population that applied for resident status”?

6. What is the unit of analysis for the regression? How many observations are there?

7. Where is Li et al. (2020)? What is RNAL?

8. I am not convinced that the political economic discussion in literature review is relevant to this study.

9. It is puzzling to see the negative association between “Apartments completed in new constructions for family housing” and RDHR, reported in the standard model of Table 3. Should more housing construction be associated with a higher level of housing affordability?

10. Should the high homeownership rate of Lisbon (above 70%) help shield most residents from rising home prices? Should young people, renters, and first-time homebuyers be more affected by the declining housing affordability?

11. Who determines land use in Lisbon? How difficult is it to build new houses in Lisbon?

Author Response

Reviewer 2

Dear authors,

I have read through the manuscript with great interests, because housing affordability is a major urban issue. This study examines housing affordability issues in Lisbon from 2004 to 2019--a period punctuated by both the global financial and the European debt crises. The crises had led to lower income and housing prices in Portugal. The prices have recovered since 2014, even though income has not increased at the same level. Consequently, the authors suggest that housing has become less affordable. In this study, the key dependent variable is RDHR (Housing Expenditure to Income Racio). Results show a greater influence of factors such as tourism, the foreign population with resident status, the propagation of short-term rentals.

Reply:

Thank you for your comment.

Although this paper covers an important issue and the results are potentially interesting, I have serious concerns:

1. How is the boundary and the population of Lisbon determined? Is it based on the municipality of Lisbon? Has the boundary changed over time? Based on the statistics that I see, the population of Lisbon has not significantly increased. The overall population in Portugal was 8.7 million in 1970 and 10.3 million in 2020. In contrast, according to INE, Lisbon had a population of 769,044 in 1970, 564,657 in 2001, and 544,851 in 2021.

Reply:

The boundary is defined by the Lisbon municipality. The boundary has been slighted altered due to the 2012 amendment of administrative limits, but it had no significant impact on population nor demographics. Due to the creation of the Parque das Nações parish, a small portion of the Loures municipality was passed onto Lisbon administration. However, if we see the population results for the equivalent region of Parque das Nações it stood at 10405 in 2011 increasing to 10823 in 2021, which totals a 4% increase when accounting for the parish total population, or a 0,07% when accounting for the whole municipality. 

We have added the following paragraph to the paper:

“It is important to note that the data refers to Lisbon’s municipality and not to Lisbon’s Metropolitan Area (LMA). Additionally, we should note that, due to Law n.º 56/2012, Lisbon parishes were subject to changes in their administrative limits, leading to the creation of Parque das Nações parish, which included a small portion of the Loures municipality to be transferred to Lisbon’s administration. However, this increase in area did not change their population significantly.” 

2. How is "the commoditization of the investment in real estate" defined in the Portugal context? Some statistics and references might help.

Reply:

Thank you for your comment.

Please note that we have added the following paragraph:

“This shows the effects of the “commoditization” of real estate, which is often seen not as a shelter for households but as a commodity to be traded. The traditional features and location of such properties are highly value not only by buy-and-hold investors but especially by those aiming to turn into the short-term rental business, as it gives their guests the feeling of being part of the city while creating an outward pressure for traditional households to move out and forcing a gentrification process to occur.”

Additionally, please note that between 2015 and 2020, long-term rentals saw a 75% decrease in number, due to the rise of short-term rentals.

3. The housing prices bottomed in Lisbon around 2014 and increased afterwards. Does this reflect a return to "normalcy"?

Reply:

Thank you for your comment.

Kindly note that this does not reflect a return to normalcy, as reflected by the ratios, before the financial crisis arrived in Portugal in 2007 the ratio was approximately 40%. In the last year of the study the ratio reached 57%, a total increase of 16%. We have added the following table and comment

Table 1 - RDHR for Lisbon during 2004-2019. Source: authors calculations

The ratios show that the present levels of housing affordability do not reflect a return to normalcy on the rebound of the financial crisis but rather a peak value in recent years. 

4. I do not see an analysis of “the variations on affordability in Lisbon.”

Reply:

We have changed the sentence and it now reads as follows: “This paper will focus on analyzing affordability in Lisbon and also to understand its main determinants.”

5. I want to see a summary table for the data. I need to see what variables are included in both the standard and the stepwise models. What is the size of “Foreign population that applied for resident status”?

Reply:

Kindly note that we have added a summary table to our table, containing summary statistics, as well as units and data sources.

Please note that in 2004, there were 1391 requests for resident status by foreigners while in 2019 that number reached 23.707.

6. What is the unit of analysis for the regression? How many observations are there?

Reply:

Please note there were 16 observations in the regression that correspond to the years analysed (2004-2019). We aimed for a larger number of observation but, unfortunately, we were not able to have a more detailed dataset comprising the period in analysis due to data unavailability. We must note that, the data provided by the National Statistics Institute (INE) is quite scarce in regard to real estate, in the years before 2009.

In order to optimize the results, we opted for the standardization of the database, in an effort to prevent the algorithm of the calculation software from overestimating the variables with a higher order of magnitude. For this, formula 1 was used, where z is the standardizedvalue, x the initial value and µ and σ the mean and standard deviation of the values of each indicator in the 2004-2019 time span.

We have added the following to the paper:

 “All data in our models was previously standardized, in order to prevent scaling-induced bias.”

7. Where is Li et al. (2020)? What is RNAL?

Reply:

Thank you for your comment. We’ve added the reference to Li et al. 2020 as follows:

Li, K., Qin, Y., e Wu, J. (2020). Recent housing affordability in urban China: A comprehensive overview. China Economic Review, 59. https://doi.org/10.1016/j.chieco.2019.101362

Addtionally, please note that RNAL is the National Register of Local Accommodation Establishments (in portuguese, Registo Nacional de Estabelecimentos de Alojamento Local). We’ve added an explanatory footnote to the paper.

8. I am not convinced that the political economic discussion in literature review is relevant to this study.

Reply:

We have deleted the political economic discussion. We agree with the reviewer that it was not adding value to the paper.

9. It is puzzling to see the negative association between “Apartments completed in new constructions for family housing” and RDHR, reported in the standard model of Table 3. Should more housing construction be associated with a higher level of housing affordability?

Reply:

Indeed, one would expect a positive relationship between the increase in housing supply and the increase in affordability, as a larger supply would theoretically meet demand on a lower price point. However, the issue in Lisbon is not only related with the number of newly built dwellings but especially with the type of properties being developed. Although we do not have actual numbers on the number of properties sold by type (low class/middle class/upper class targeted construction), it is clear on the ground that developers have been favoring the upper-class construction. For example, in this[1] interview, the CEO of a real estate development group states that the maximum price which young middle class Portuguese couples can afford is 2000€/m2, leading his company to build luxury developments on the outskirts rather than in Lisbon municipality. In this[2] other interview, the president of the Portuguese Association of Real Estate Developers and Investors (APPII) claims that high construction costs are blocking developments targeted to the middle class. In the municipality of Lisbon, median prices in the last 12 months reach 3704€/m2 (as of the second quarter of 2022). Drilling down by tax residence of the purchaser, we see that the median price for national buyers is 3574€/m2 while for foreign buyers it reaches 5230€/m2. So this “decoupling” of what is being built and for whom it is being built may lead to the negative association between the number of apartments completed in new construction for family housing and the RDHR.  

We have added the following to the paper:

“Although the variable concerning the apartments completed in new constructions for family housing shows a p-value of over 5% in the standard model regression, it is essential to clarify this result in light of Lisbon’s reality.  One would expect a positive relationship between the increase in housing supply and the increase in affordability, as a larger supply would, theoretically, meet demand at a lower price point. However, the issue in Lisbon is related not only to the number of newly built dwellings but also to the type of properties being developed. Although there are no actual published numbers on the split of properties sold by type (low class/middle class/upper class targeted construction), it is clear on the ground that developers have been favouring the upper-class. According to real estate developers, the Portuguese middle class is cannot keep up with the increasing valuations in the capital city, leaving middle-class developments to the city’s neighboring municipalities. During the last 12 months, median prices in Lisbon reach 3704€/m2 (as of the second quarter of 2022[3], far off the average middle class home buyer. Drilling down by purchaser’s tax residence, we see that the median price for national buyers is 3574€/m2 while for foreign buyers it reaches 5230€/m2, reflecting this divergence between national and foreign home buyers. Hence, this “decoupling” between new construction and local average incomes leads to a negative association between the number of apartments completed in new construction for family housing and the RDHR. This shows that an increase in the number of new developments does not necessarily translate into an effective increase in offers for local populations, especially those in the middle and lower classes.”

10. Should the high homeownership rate of Lisbon (above 70%) help shield most residents from rising home prices? Should young people, renters, and first-time homebuyers be more affected by the declining housing affordability?

Reply:

Thank you for your comment. Yes, that is indeed the case. We have added the following paragraph:

“One one should note that young people, renters and first-time buyers are the most affected by the rising prices and declining housing affordability as long-time homeowners may even benefit from the decline in housing affordability, whether by simple housing value appreciation or by equity effects (Gordon 2020) in the case of property sale.”

11. Who determines land use in Lisbon? How difficult is it to build new houses in Lisbon?

Reply:

The land use in Lisbon is determined by the City Council, however, most development is led by private initiative. Most locations have building height restrictions and thus, to meet demand and maximize profits, real estate developers have been aiming the upper and upper middle class, as well as foreign investors, as their primary target. Therefore, an increase in the number of new developments does not necessarily translates into an effective increase in offer for local populations, especially to those in the middle and lower classes. Real estate developments by the public sector have been neglectable, and do not meet the needs of the population. In recent years, the City Council has been trying to address the housing affordability issues but we are yet to see some concrete and definitive results on increasing affordability.

We have added the following to the paper:

“Despite land use in Lisbon being determined by the City Council, most development is led by private initiative which, in recent years, have been aiming for developments for the upper and upper-middle class, as well as foreigners, as their primary target. This happens in an attempt to maximize profits, surpassing the high costs in taxes and the limitations imposed by building height restrictions. Real estate developments by the public sector have been neglectable, and do not meet the population's needs. In recent years, the City Council has been trying to address the housing affordability issues, but we have yet to see concrete and definitive results on increasing affordability.”

[1] https://visao.sapo.pt/imobiliario/2021-10-29-casas-de-luxo-para-a-classe-media-nas-periferias-fazem-disparar-procura/

[2] https://appii.pt/noticias/noticias-appii/%C3%A9-preciso-baixar-o-iva-na-constru%C3%A7%C3%A3o-para-a-habita%C3%A7%C3%A3o-destinada-%C3%A0-classe-m%C3%A9dia/

[3] Source: National Statistics Institue (INE)