Portugal Residential Real Estate Market Analysis 2023
Portugal’s housing market remains healthy, amidst the continued increase in property demand coupled with robust residential construction activity.
During the year to November 2022, the median price of dwellings in Portugal surged 13.92% to €1,449 (US$1,570) per square meter (sq. m), according to data released by the Instituto Nacional de Estatistica (INE). Dwelling prices have been rising by double-digit figures since October 2021.
Source: Instituto Nacional de Estatistica
However when adjusted for inflation, nationwide dwelling prices have actually increased by a more modest 3.64% y-o-y in November 2022.
Property prices in Portugal started to recover in 2014 and have been rising since. House prices rose by 4.9% in 2015, 5.7% in 2016, 7% in 2017, 9.7% in 2018, 11.7% in 2019, 6% in 2020 and 11.2% in 2021.
In Lisbon metropolitan area, property prices were up by a huge 15.2% (4.8% in real terms) in November 2022 from a year earlier, to a median price of €1,929 (US$2,091) per sq. m.
- In the North, the median property price rose strongly by 11.7% y-o-y in November 2022 (1.6% in real terms), to €1,223 (US$1,326) per sq. m.
- In the Center, property prices soared by 14.1% y-o-y in November 2022 (3.8% in real terms), to €1,026 (US$1,112) per sq. m.
- In Alentejo, property prices rose by 14.1% (3.8% in real terms) y-o-y to €996 (US$1,080) per sq. m.
- In Algarve, property prices rose by 17.6% (7% in real terms) y-o-y to €2,009 (US$2,178) per sq. m.
- In the Azores Islands, property prices increased 13.3% (3.1% in real terms) y-o-y to €1,079 (US$1,170) per sq. m.
- In Madeira, the median property price rose strongly by 13.8% (3.5% in real terms) y-o-y to €1,463 (US$1,586) per sq. m. in November 2022.
By property type, apartment prices rose by 14.9% y-o-y to €1,610 (US$1,745) per sq. m. while house prices increased 11.3% to €1,148 (US$1,244) per sq. m.
Demand continues to grow. During the first three quarters of 2022, the total number of housing transactions in Portugal rose by 8% y-o-y to 129,374 units while transaction value increased 22.9% y-o-y to €24.42 billion (US$26.47 billion), according to INE. All regions saw strong to moderate increases in housing transactions over the same period.
The residential construction sector remains robust. In the first three quarters of 2022, licenses for new construction increased 3.1% to 22,845 units as compared to the same period last year. Likewise, dwelling completions were up slightly by 1.6% y-o-y to 14,451 units in Q1-Q3 2022.
The Portuguese economy was estimated to have grown by a robust 6.7% in 2022 from a year earlier, following a 5.5% expansion in 2021 and an 8.4% contraction in 2020. The robust growth was primarily buoyed by a stronger recovery in tourism and higher private consumption. However, the economy will slow sharply this year, with a projected real GDP growth rate of just 0.7%, based on figures released by both the European Commission and the International Monetary Fund (IMF). The Banco de Portugal’s forecasts are slightly better, expecting a growth of 1.5% this year and 2% in 2024.
Demand is rising robustly
During the first three quarters of 2022, the total number of housing transactions in Portugal rose by 8% y-o-y to 129,374 units while transaction value increased 22.9% y-o-y to €24.42 billion (US$26.47 billion), according to INE.
In Q1-Q3 2022:
- Existing dwellings: the number of transactions rose by 6.4% y-o-y to 106,310 units while transactions value surged 21.1% to €18.51 billion (US$20.06 billion).
- New dwellings: the number of transactions increased strongly 16% y-o-y to 23,064 units while transactions value rose by 28.7% y-o-y to €5.91 billion (US$6.41 billion).
By region, Algarve had the biggest surge in the number of housing transactions, registering a y-o-y increase of 16.7% in the first three quarters of 2022, followed by Centro (9%), Alentejo (7.9%), AM Lisbon (5.9%) and Norte (5.2%).
In the autonomous regions of Madeira and Azores Islands, housing transactions increased by 27.5% and 12.9%, respectively.
There are no restrictions on foreign property ownership in Portugal and transaction costs are generally low.
Under Portugal’s Golden Visa Program, the country grants a 5-year residency permit to non-EU citizens who buy a minimum of €500,000 worth of property, allowing holders to work or study, and travel to Schengen countries. They can apply for permanent residency after five years. If the property is in a low-density area, the minimum investment drops to €400,000.
Construction activity remains healthy
After a long slump in construction, the number of licensed new constructions rose by 21.8% y-o-y in 2015 to 8,491 units, by 36.1% to 11,558 units in 2016, by 29.3% to 14,946 units in 2017, by 44.4% to 21,587 units in 2018 and by another 15.4% y-o-y to 24,905 units in 2019.
The growth in residential construction activity slowed in 2020 due to the adverse impact of the pandemic, with licenses rising by just 3.1% y-o-y to 25,684 units. Activity improved again in 2021, with the number of licensed new constructions increasing by 11% to 28,508 units.
Dwelling completions have followed a similar pattern, rising continuously from 2016 to 2021, with an average growth of 18.7% annually. During 2021, there were 19,081 dwellings completed.
The residential construction sector remained more or less steady last year.
- Licenses for new construction: 22,845 units in Q1-Q3 2022, up by 3.1% from a year earlier
- Dwelling completions: 14,451 units in Q1-Q3 2022, up slightly by 1.6% from a year ago
Total dwelling stock was 6,002,874 units during 2021, recording a marginal increase of 0.3% from a year earlier, based on figures from INE. The northern region accounted for 31.7% of the total stock, followed by AM Lisbon (with 25.2% share) and the central region (with 24.7% share).
House prices already more than 60% above pre-recession levels
As of November 2022, Portugal’s nationwide house prices were about 61% above their previous nominal peak, seen in 2010. The housing market began to recover in Q4 2014, after 13 consecutive quarters of y-o-y house price declines. Despite the Covid-19 pandemic, house prices continued to rise in the past three years.
By region, AM Lisbon’s house prices are now about 73% above its previous peak. Also, house prices in Algarve are now more than 70% up while they are nearly 63% up in the North. House prices in the Centre are up by 40%. In Alentejo, prices are now above their previous peak by almost 22%.
Likewise, house prices in the autonomous regions of Azores Islands and Madeira are up by about 25% and 28%, respectively.
The house price boom that swept most of Europe and the developed world from the mid-1990s to 2006 completely by-passed Portugal, except in the Algarve. One of the reasons is the country’s sluggish economic growth. The country has grown by an average of just 0.3% per year from 2001 to 2016 before registering an annual average growth of 3% from 2017 to 2019.
Surprisingly, the Portuguese housing market showed increased resilience in the past several years, with house price growth accelerating despite the Covid-19 pandemic.
- 2003 - 2004: house prices rose by an average of 6.2% y-o-y (3.3% in real terms);
- 2005 - 2007: prices rose by an average of 1.25% (-1.3% in real terms);
- 2008: prices fell by an average of 4.7% (-7.1% in real terms);
- 2009: prices fell by an average of 2.6% (-1.8% in real terms);
- 2010 - 2012: house prices fell by an average of 3.1% (-5.5% in real terms);
- 2013-2014: house prices dropped by an average of 1.5% (-1.5% in real terms), and;
- 2015-2020: house prices rose by an annual average of almost 6% (5.3% in real terms).
- 2021: house price growth accelerated to 11.2% (8.2% in real terms).
Portuguese property is very inexpensive
From the perspective of the foreign buyer, Portuguese property is astonishingly good value, despite the recent house price increases. Algarve, which is known for its Mediterranean beaches and golf resorts, had the most expensive housing in Portugal, with a median house price of €2,009 (US$2,179) per sq. m in November 2022, according to figures from INE. It is followed by Lisbon Metropolitan Area and Madeira, with median house prices of €1,929 (US$2,092) per sq. m. and €1,463 (US$1,587) per sq. m., respectively.
Portugal’s house price to GDP per capita ratio is one of the lowest in Europe, according to Global Property Guide research. Again, in terms of square metre prices, Portugal has some of the lowest prices for city-centre property in Europe.
Rental yields are moderately good
Apartments in Lisbon continue to obtain moderately good rental yields, ranging from 3.06% to 10.39% and an average of 5.59%, according to a research conducted by the Global Property Guide in November 2022. These are good yields and the purchase price is attractive for a European capital city.
As a reminder, the rental yield is the total percentage return you would earn as a landlord, when renting out your property.
Apartments in Porto can generate returns between 3.43% to 6.73% with a city average of 4.85%. As a disclaimer, Porto’s numbers may be somewhat inconsistent due to a limited supply of rental units. This is possibly due to Portugal’s Golden Visa program.
Apartments in Faro return rental yields of around 4.66%. Aveiro has an average return of 4.90%, Funchal produces 5.94%, Braga’s average is 4.78% and in Setubal it’s 5.69% on average.
In terms of price to rent ratios, Global Property Guide research suggests that Lisbon is exceptionally good value. However, round trip transaction costs can be high in Portugal.
Interest rates are rising rapidly
After staying more or less steady in the past six years, interest rates on housing loans are now noticeably rising. In November 2022, the average interest rate on housing loans stood at 1.84%, sharply up from 0.84% a year earlier.
By maturity, as of November 2022:
- Up to 1 year: 2.04%, slightly down from 2.19% a year earlier
- Over 1 and up to 5 years: 5.28%, up from 4.61% a year earlier
- Over 5 years: 1.84%, up from 0.83% a year ago
The rapid rise in mortgage rates in Portugal was partly due to the recent rate hikes of the European Central Bank (ECB). After holding the repo rate unchanged for more than six years at a record low of 0.00%, the ECB raised it four consecutive times in the past six months, reaching 2.50% in December 2022.
The Portuguese mortgage market is extremely sensitive to interest rate changes, since more than 60% of new mortgage loans issued annually in recent years have variable interest rates or initial rate fixation of less than one year, according to the European Mortgage Federation (EMF).
Sluggish mortgage market
Portugal’s mortgage market grew from 41.5% of GDP in 2000 to 65.7% of GDP in 2012. But housing loans have declined for the past nine consecutive years by an annual average of 1.5% from 2012 to 2021. As a result, the size of the mortgage market has shrunk to just around 42% of GDP in 2022, based on figures by the Global Property Guide.
In November 2022, housing loans outstanding in Portugal increased 3.9% y-o-y to €101.61 billion (US$110 billion), according to the ECB.
Small rental market, changes in tenancy laws
Portugal has one of the highest owner-occupation rates in Europe, partly caused by generous government mortgage subsidies having helped push up owner occupation from 52% of all housing in 1981, to an average of about 75% from 2004-2021. It reached an all-time high of 78.3% in 2021.
Meanwhile the private rental market has shrunk from 39% of total dwelling stock in 1981, to currently about 20%. The social rental sector is small at around 3% of the total housing stock, or 16% of total rental stock.
The shrinking of the private rental market was also caused by tenancy laws that gave tenants strongly controlled rents and protected them against eviction. As a result, young people usually either live at home, or pay exorbitant key money, or buy an apartment. This led to a considerable pent-up demand for rental housing.
Things were improved by Law 31/2012, passed on August 14, 2012, which gave more rights to landlords. The new measure was one of the conditions for the country’s €78-billion bailout agreement from the IMF, ECB and European Commission.
Changes in the law include the following:
- The new legislation allows parties to agree on any duration of lease, instead of the previous minimum of 5 years. If a period is not defined in the contract, the lease is assumed to be set for two years, which can be renewed automatically.
- There is now a procedure for revising rental values: (1) landlord proposes a new rent to the tenant; (2) the tenant accepts or suggests a counterproposal; (3) if no agreement is reached the agreement may be terminated, and the landlord pays five years’ worth of rent as compensation. Exemption is given to tenants with financial difficulties, who enter a transitional regime with small rent increases for five years. A special transitional regime is also applicable to tenants over 65 years old, or with 60% disability.
- As with the previous law, in case of death of the tenant, the lease will be transferred to the spouse, common law spouse, or relatives, but now only for a period of two years. The tenant’s beneficiaries are not allowed to hold purchased or rented property within the same municipality, or in Lisbon and Oporto’s case, in neighbouring municipalities either.
The new law also strengthened the landlord’s ability to terminate a lease agreement.
- The landlord has the right to terminate the contract if the tenant fails to pay two consecutive rents and still hasn’t paid the rents due at the end of the third month.
- If the tenant fails to pay on time (or more than eight days after the due date) for four times in a year, the landlord can terminate the contract.
- The landlord is allowed to terminate the contract by notifying the tenant of its intention to terminate the contract with at least two years notice.
- If the landlord wishes to demolish or undertake works on the property, he may also terminate the lease.
The law aims to update the rents of older contracts, as well as amending the Law 6/2006 or the New Urban Lease Act (Novo Regime de Arrendamento Urbano – “NRAU”) – an attempt to solve old lease issues.
The legislation also includes a special procedure on evicting tenants who do not vacate the property on the specified date by the court or the contract. It also creates the National Office for the Leases (BalcãoNacional de Arrendamento) where a landlord may apply so as to notify the tenant to vacate the property.
Several other laws came to force after, including the Law No. 13/2019 and the Cristas Law of February 202o, which aims to correct the imbalance situations between the tenants and landlords, to enhance the security and stability in urban letting and to protect tenants in a particularly vulnerable situation. More particularly, they grant tenant protection from harassment of the landlord during the lease period.
Strong economic growth in 2022, but sharp slowdown ahead
The Portuguese economy was estimated to have grown by a robust 6.7% in 2022 from a year earlier, according to the country’s central bank, following a 5.5% expansion in 2021 and an 8.4% contraction in 2020. The robust growth was primarily buoyed by a stronger recovery in tourism and higher private consumption.
However, the economy will slow sharply this year, with a projected real GDP growth rate of just 0.7%, based on figures released by both the European Commission and the International Monetary Fund (IMF). The Banco de Portugal’s forecasts are slightly better, expecting a growth of 1.5% this year and 2% in 2024.
“After a strong recovery, Portugal’s economy is projected to slow down substantially in the near term, constrained by weak external demand and high energy prices. Growth is expected to pick up again as of next summer but risks remain on the downside,” said the European Commission.
Before the Covid-19 pandemic, the country saw six years of continued growth from 2014 to 2019 after a series of dismal years.
After a slight budget surplus of 0.1% of GDP in 2019 (the first surplus in the country’s 45 years of democracy), the country recorded a 5.8% budget deficit in 2020, amidst pandemic-related stimulus aids. The shortfall eased to 2.9% of GDP in 2021 and further to 1.9% of GDP in 2022. The European Commission expects the budget deficit to fall further to 1.1% of GDP this year and to 0.8% of GDP in 2024.
Portugal’s public debt also improved, falling to about 115.9% of GDP in 2022, from 125.5% in 2021 and 135.2% in 2020. It is expected to fall further to 109.1% of GDP this year and to 105.3% of GDP next year.
As a result of improving public finances, Fitch Ratings recently upgraded the country’s long-term foreign-currency issuer default rating to ‘BBB+’ from ‘BBB’ with a stable outlook. This followed a similar upgrade by Standard and Poor’s in September 2022.
“Underpinned by a strong commitment to prudent fiscal policy, and despite significant external shocks, fiscal outturns have persistently outperformed both the ´BBB´ rating category and European peers,” said Fitch Ratings.
Nationwide inflation was 9.6% in December 2022, down from 9.9% in the previous month but still remained close to the 30-year high of 10.1% recorded in October 2022, based on figures from the INE. It is also well above the European Central Bank’s target rate of 2%. Inflation slowed to an average of 0.6% annually from 2013 to 2021, from 2.6% in 2000-2012.
Unemployment stood at 5.8% in Q3 2022, from 5.7% in Q2 and 5.9% in Q1. Before the pandemic, the jobless rate had been steadily falling, from 17.1% in 2013 to 6.7% in 2019. It is expected to remain low at 5.9% this year, unchanged from 2022 but down from 6.6% in 2021 and 7.1% in 2020, according to the Banco de Portugal.
- Bank appraisals on housing increased to 1,449 euros per square meter - November 2022 (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=539435507&DESTAQUESmodo=2
- Key ECB interest rates (European Central Bank): https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html
- Building permits and completed buildings keep decreasing compared to 2021 - 3rd Quarter 2022 (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=540842217&DESTAQUEStema=5414344&DESTAQUESmodo=2
- House prices increased 13.1% - 3rd Quarter 2022 (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=539485991&DESTAQUEStema=5414344&DESTAQUESmodo=2
- Economic forecast for Portugal (European Commission): https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/portugal/economic-forecast-portugal_en
- Portugal´s finance minister sees 2022 growth above target, focus on debt cuts (Reuters): https://www.reuters.com/markets/europe/portugals-finance-minister-sees-2022-growth-above-target-focus-debt-cuts-2022-11-16/
- Portugal’s central bank lifts 2022 GDP forecast, warns of 2023 slowdown (Reuters): https://www.reuters.com/business/finance/portugals-central-bank-raises-2022-gdp-forecast-67-2022-10-06/
- Economic projections (Banco de Portugal): https://www.bportugal.pt/en/page/projecoes-economicas
- Portugal´s draft budget targets lower deficit despite steep slowdown (Reuters): https://www.reuters.com/markets/europe/portugals-draft-budget-targets-lower-deficit-despite-steep-slowdown-2022-10-10/
- Portugal Raised to BBB+ by Fitch on Narrowing Budget Deficit (Bloomberg): https://www.bloomberg.com/news/articles/2022-10-28/portugal-raised-to-bbb-by-fitch-on-narrowing-budget-deficit
- Fitch Upgrades Portugal to ´BBB+´; Outlook Stable (Fitch Ratings): https://www.fitchratings.com/research/sovereigns/fitch-upgrades-portugal-to-bbb-outlook-stable-28-10-2022
- Portugal At a Glance (International Monetary Fund): https://www.imf.org/en/Countries/PRT
- Consumer price index (Year-on-year monthly growth rate - Base 2012 - %) by Geographic localization and Special aggregates (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_indicadores&contecto=pi&indOcorrCod=0002386&selTab=tab0
- Portugal Inflation Rate (Trading Economics): https://tradingeconomics.com/portugal/inflation-cpi
- House Prices/GDP per Capita in Portugal compared to Europe (Global Property Guide): https://www.globalpropertyguide.com/Europe/Portugal/price-gdp-per-cap
- Square Metre Prices in Portugal compared to Europe (Global Property Guide): https://www.globalpropertyguide.com/Europe/Portugal/square-meter-prices
- Rental yields in Lisbon are moderately good (Global Property Guide): https://www.globalpropertyguide.com/Europe/Portugal/Rental-Yields
- Hypostat 2022: A Review of Europe’s Mortgage and Housing Markets (European Mortgage Federation): https://hypo.org/app/uploads/sites/2/2022/09/HYPOSTAT-2022-FOR-DISTRIBUTION.pdf
- What Are the Rights of Tenants and Landlords in Portugal? (Flatio): https://www.flatio.com/blog/what-are-the-tenant-and-renters-rights-in-portugal
- Portugal Homeownership Rate (Trading Economics): https://tradingeconomics.com/portugal/home-ownership-rate
- New Tenant Rights in Portugal (Blanca Valbuena): https://blancavalbuena.com/tenant-rights-portugal/
- Portugal Golden Visa: The Definitive Guide 2023 (Get Golden Visa): https://getgoldenvisa.com/portugal-golden-visa-program
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