Portugal's house price boom continues!
Lalaine C. Delmendo | February 06, 2019
After more than three years of depression, house prices in Portugal started to recover in 2014. House prices have been rising since.
In Lisbon metropolitan area, property prices were up by 7.9% (7.2% in real terms) in 2018 from a year earlier, to an average of €1,502 (US$1,717) per sq. m.
House prices rose in 23 of the country's 24 urban areas. Porto recorded the highest increase of 15.6% during 2018, followed by Amadora and Seixal (13.9%), Sintra (13.7%), Setúbal (13.5%), Maia (13.4%), Almada (12.9%), Loures (12.6%), Barcelos (11.4%), Cascais (10.6%), Vila Franca de Xira (10.5%), Vila Nova de Gaia (10.3%) and Braga (10.1%).
Strong house price rises were also registered in Matosinhos (9.8%), Odivelas (9.7%), Gondomar (8.2%), Oeiras (8%), Vila Nova de Famalicão (7.5%), Leiria (6.6%) and Guimarães (6.4%).
Modest house price increases were seen in Santa Maria da Feira (4.6%), Lisbon (2.4%) and Funchal (2.3%). Only Coimbra saw a house price decline of 2% during 2018.
By property type:
- Flats prices rose by 7% (6.3% in real terms) y-o-y in 2018, to an average of €1,284 (US$1,468) per sq. m.
- Villa prices rose by 4.9% (4.2% in real terms) during 2018, to an average of €1,119 (US$1,279) per sq. m.
Demand is rising strongly. In Q3 2018, the total number of housing transactions in Portugal rose strongly by 18.4% to 45,935 units from a year earlier, according to INE. Likewise, the value of transactions surged 29.1% y-o-y to €6.28 billion (US$7.17 billion) over the same period. Clearly the new wealth tax introduced in 2017, applicable to higher-valued properties, has in fact had a negligible impact on the luxury housing market.
The Portuguese housing market is expected to remain buoyant this year, with Moody's Investors Service predicting house price increases of between 7% and 8% every year until 2020.
There are no restrictions on foreign property ownership in Portugal and transaction costs are generally low.
Portugal will grant a 5-year residency permit to non-EU citizens who buy a minimum of €500,000 worth of property. The permit allows holders to work or study, as well as to travel in Schengen countries. They can opt to apply for permanent residency after five years.
The Portuguese economy expanded by 2.2% in 2018 from a year earlier, after annual rises of 2.8% in 2017, 1.6% in 2016, 1.8% in 2015, and 0.9% in 2014, according to the European Commission. The economy is expected to grow by 1.8% this year and by another 1.7% in 2020.
Rental yields on Lisbon apartments good, ranging from 5.4% to 6.2%
Lisbon's property market is now reasonably priced. Comparatively speaking, Lisbon housing prices are among Europe's lowest:
- an 85 square metres (sq. m.) Lisbon apartment in an elite area may cost around EUR 200,000 to buy.
- a 120 sq. m. Lisbon apartment may cost around EUR 300,000 to buy.
- a 250 sq m. Lisbon apartment may cost around EUR 840,000
How much will you earn? Apartment yields in Lisbon District range from 4.5% to 6.7%, with smaller apartments earning proportionately more. These are good yields and the purchase price is attractive for a European capital city, though Lisbon is hardly at the centre of things. Villas in Lisbon have similar gross rental yields.
Cascais apartments can generate excellent returns at 6.7%, while houses in Oeiras can generate surprisingly good returns at 6.15%
In Faro, Algarve, a 120 sq. m. apartment costs on average EUR 1,870 per sq. m., or EUR 215,000. Apartments in Faro return rental yields of around 4.5%.
Our rental yields figures assume long-term lets; short-term rentals may earn higher returns.
Conclusion: after many years on the back-burner, Lisbon is looking good. Tourist interest in the centre of Lisbon is enormous, so the option of letting via Airbnb is there for much of the year. Lisbon's rental yields are comparatively among the highest in Europe, and Lisbon's price to rent ratios are among Europe's lowest.
Round trip transaction costs can be high in Portugal. See our property transaction costs analysis for Portugal and Property transaction costs in Portugal, compared to the rest of Europe.
Taxes range from moderate to high in Portugal
Rental Income: Net rental income is taxed at a flat rate of 28%, withheld by the tenant. Repairs, maintenance expenses, and local taxes are deductible from the gross rent.
Capital Gains: Net capital gains are taxed at a flat rate of 28% in Portugal. Acquisition costs are deducted from the gross selling price of the property.
Inheritance: There are no inheritance and gift taxes in Portugal.
Residents: Resident individuals' worldwide income is subject to progressive tax rates, from 14.50% to 48%.
Buying costs in Portugal are moderate
Roundtrip transaction costs, i.e., the cost of buying and selling a property, range from 5.69% to 20.15%. Significant costs include the real estate agent’s fee (3% to 5%, plus 23% VAT), transfer tax (0% to 10%) and legal fees (1% to 2%).
Portuguese law is strongly pro-tenant
The law in Portugal is still strongly pro-tenant, despite substantial changes brought by the New Urban Lease Act.
Rent: The amount of the rent can usually be freely agreed between the parties, with the exception of low cost housing. Rent reviews can also be freely agreed (although they must take place annually), and, with careful drafting, cost-of-living rent increases and suchlike can be agreed.
Tenant Security: The parties may stipulate fixed-term contracts, but they must have a minimum initial term of five years, and there are automatic and consecutive extensions of three years. In the absence of such a fixed term stipulation, the lease agreement will be considered open-ended. Open ended contracts were previously much like ‘tenancy for life’ agreements and are very difficult to terminate.
Modest economic growth; improving financesThe Portuguese economy expanded by a modest 2.2% in 2018 from a year earlier, after annual rises of 2.8% in 2017, 1.6% in 2016, 1.8% in 2015, and 0.9% in 2014, according to the European Commission. The economy is expected to grow by 1.8% this year and by another 1.7% in 2020.
The improving economic condition comes after a series of dismal years. Portugal’s economy contracted 1.1% in 2013, 4% in 2012, and 1.8% in 2011, according to the IMF. In 2010, the economy grew by 1.9%, but in 2009 GDP contracted by 3%, after average annual growth of only 1.2% between 2004 and 2008.
Portugal was the second euro zone country to exit its bailout program in May 2014, after three years of austerity. Portugal had sought its €78 billion (US$89.2 billion) bailout program in 2011, due to the government’s inability to meet its debt payments.
Portugal still faces a huge public debt burden of around 121.5% of GDP in 2018, but it is already an improvement from 124.8% in 2017, 129.9% in 2016, 128.8% in 2015 and 130.6% in 2014, according to the European Commission. The country’s public debt is expected to fall to around 119.2% of GDP in 2019 and to 116.8% of GDP in 2020.
The country’s fiscal deficit stood at 0.7% of GDP in 2018, sharply down from 3% in 2017, 2% in 2016, 4.4% in 2015 and 7.2% in 2014. The deficit is expected to fall further to around 0.6% of GDP this year and to 0.2% of GDP in 2020, according to the European Commission.
Inflation stood at 0.7% in December 2018, down from 0.9% in November, 1% in October and 1.4% in September 2018, according to INE. Inflation is expected to accelerate to 1.6% this year, from an annual average of just 0.8% in the past six years, according to the IMF.
Unemployment was 6.7% in November 2018, down from 8.2% from the same period last year, according to INE. Portugal’s jobless rate averaged about 13.2% from 2011 to 2017.