Portugal’s house price boom continues strong
Lalaine C. Delmendo | February 19, 2020
Portugal’s housing prices continue to rise strongly, fuelled by low interest rates as well as improved economic conditions.
Property prices in Portugal soared by almost 8% (7.7% in real terms) y-o-y in November 2019, to an average price of €1,312 (US$1,461) per square metre (sq. m.), based on figures released by the InstitutoNacional de Estatistica (INE).
House prices in Portugal started to recover in 2014 and have been rising since. House prices rose by 4.5% in 2015, 4.8% in 2016, 4.6% in 2017 and 6.1% in 2018.
In Lisbon metropolitan area, property prices were up by 9.5% (9.2% in real terms) in November 2019 from a year earlier, to an average of €1,631 (US$1,816) per sq. m.
House prices rose in 23 of the country’s 24 urban areas. Sintra recorded the highest increase of 18.3% during the year to November 2019, followed by Gondomar (16.7%), Vila Franca de Xira (15.5%), Vila Nova de Gaia (15.3%), Amadora (14.8%), Matosinhos (13.8%), Braga (12.7%), Funchal(11.3%), Almada (11.2%), Odivelas(10.5%), Seixal (10.4%), and Maia (10%). Strong house price rises were also registered in Vila Nova de Famalicão (9.8%), Coimbra (9.2%), Guimarães (8.5%),Setúbal (7.8%), Barcelos(6.6%), Oeiras(6.3%) and Loures (6.1%).
Modest to minimal house price increases were seen in Cascais (5.6%), Santa Maria da Feira (4.5%), Porto (3.3%), and Lisboa (0.5%). Only Leiria saw a house price decline of 2.5% during the year to November 2019.
By property type:
- Flats prices rose strongly by 9.8% (9.5% in real terms) y-o-y in November 2019, to an average of €1,402 (US$1,561) per sq. m.
- Villa prices rose by 4.2% (3.9% in real terms) during the year to November 2019, to an average of €1,162 (US$1,294) per sq. m.
Demand remains healthy. During the first three quarters of 2019, the total value of housing transactions rose by 4.3% y-o-y to €18.65 billion (US$20.82 billion) while the number of transactions was steady at 132,246 units, according to INE. 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 around 4% - a slowdown from last year’s strong price growth but still one of the biggest increases in the region.
“A sharp rise in the price of housing, although lower than in recent years,” said Moody’s.
There are no restrictions on foreign property ownership in Portugal and transaction costs are generally low.
Portugal 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.
The Portuguese economy expanded by a modest 2% in 2019, after annual rises of 2.4% in 2018, 3.5% in 2017, 2% in 2016, 1.8% in 2015, and 0.8% in 2014, according to the European Commission. The economy is expected to grow by 1.7% annually in the next two years.
House prices above pre-recession levels
As of November 2019, Portugal´s nationwide house prices were 11.4% above their previous nominal peak, seen in May 2010.However, national house prices are still below their previous inflation-adjusted peak, which occurred in 2000.
The housing market began to recover in Q4 2014, after 13 consecutive quarters of y-o-y house price declines.
By region, Norte’s house prices are now almost 19% above the previous peak while Algarve’s prices are up 14.7%. House prices in AM Lisbon are 12.6% up, and in Centro 6.8% up. In contrast, Alentejo’s house prices are still 0.3% down from the peak.
In the autonomous regions of Madeira and Azores Islands, house prices remain 1.2% and 1.1% down from their peak, respectively.
HOUSE PRICES, NOVEMBER 2019
|Average price (Euro/sq. m.)||Y-O-Y change (%)||Q-O-Q change (%)||Change from 2010 peak (%)|
|Sources: InstitutoNacional de Estatistica (INE), Global Property Guide|
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:
- 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);
- 2015-2017: house prices rose by an annual average of 4.6% (3.7% in real terms), and;
- 2018: house prices rose by 6.1% y-o-y (5.4% in real terms).
Why did Portugal miss the boom? Largely because of sluggish economic growth. The country has grown by an average of just 0.6% annually over the past 15 years.
Portuguese property is very inexpensive.
If we were to take account of inflation, these price declines would be larger (and the increases would be smaller). Currency falls are another factor. The 5.4% appreciation in the value of Euro against the US dollar in the past four years is still not enough to offset the 21% decline from 2013 to 2015.
From the perspective of the foreign buyer, Portuguese property is astonishingly good value. Algarve, which is known for its Mediterranean beaches and golf resorts, had the most expensive housing in Portugal, with an average house price of €1,736 (US$1,938) per sq. m. in November 2019. It was followed by Lisbon Metropolitan Area and Madeira, with average house prices of €1,631 (US$1,820) per sq. m. and €1,430 (US$1,596) per sq. m., respectively. Global Property Guide’s Lisbon square metre house price research finds that Lisbon city-centre prices are higher, at around €2,500 (US$2,790) per square metre for 120 sq. m. Lisbon apartments. On the other hand, a typical 120 sq. m. apartment in Algarve is priced around €1,800 (US$2,009) per sq. m.
Portugal’s house price to GDP per capita ratio is one of the lowest in Europe, according to Global Property Guide research (see table). Again in terms of square metre prices, Portugal has some of the lowest prices for city-centre property in Europe, according to Global Property Guide research (see table).
Demand remains healthy
During the first three quarters of 2019, the total value of housing transactions in Portugal rose by 4.3% y-o-y to €18.65 billion (US$20.82 billion) while the number of transactions was almost steady at 132,246 units, according to INE.
In Q1-Q3 2019:
- Existing dwellings: the number of transactions increased by 0.3% y-o-y to 112,973 units while transactions value rose by 4.3% y-o-y to €15.08 billion (US$16.83 billion).
- New dwellings: the number of transactions fell by 1.6% y-o-y to 19,273 units while transactions value increased 4.4% y-o-y to €3.57 billion (US$3.99 billion).
By region, Centro had the biggest increase in housing transactions, registering a y-o-y growth of 10.2% in the first three quarters of 2019, followed by Alentejo, with 7% annual rise. In contrast, transactions declined in Algarve (-8.1%), Norte (-2.8%) and AM Lisbon (-2.7%).
In the autonomous regions of Azores Islands and Madeira, housing transactions rose by 14.7% and 6.6%, respectively.
Construction activity surging, but still way below peak levels
Construction activity in Portugal has been in decline since 2002. In fact, the number of licensed dwellings in new constructions plummeted by about 90% to 6,785 units in 2014, from 65,650 units in 2007, according to the INE. Licensed dwellings plunged by an average of 27% per year from 2007 to 2014.
However there have been signs of recovery in recent years, with double-digit annual rises. The number of licensed dwellings in new constructions rose by 21.8% y-o-y to 8,491 units in 2015, by 36.1% to 11,558 units in 2016, by 22.4% to 14,143 units in 2017, and by another 43.2% y-o-y to 20,259 units in 2018.
Dwelling completions have followed a similar pattern, rising by 8.8% y-o-y to 7,565 units in 2016, by 13.1% to 8,553 units in 2017 and by another 38.2% to 11,820 units in 2018.
During the first eleven months of 2019, the number of licensed dwellingpermits in Portugal surged 18.2% to 21,973 units from the same period last year. Azores Islands (33.3%) and Madeira (30.5%) had the largest increases in the number of dwelling permits for family housing in the first eleven months of 2019 from the previous year. Strong increases were also seen in Lisbon (29.7%), Alentejo (19.8%), Norte (19.5%), Algarve (12.7% and Centro (4.5%).
Likewise, completions were also up 17.2% to 10,141 units in the first three quarters of 2019 from a year earlier.
Total dwelling stock was 5,954,548 units in 2018, up slightly by 0.2% from a year earlier, according to INE.
Homebuyers shrug off new wealth tax
The new wealth tax introduced in 2017 had a negligible impact on the luxury housing market.
Officially called AdicionalImposto Municipal SobreImóveis (AIMI), the new tax is annual, charged on the Valor Patrimonial Tributário (VPT) of higher-value properties, regardless of where the owner resides. The owner is liable if his/her property (or share of a property) is worth over €600,000.
The tax rates are as follows:
- 0.4% for properties held by companies/corporate structures
- 0.7% for properties held personally or by un-administered estates up to €1 million
- 1.0% on the value of the holding in excess of €1 million
The €600,000 allowance is available to all individuals and estates, except those whose tax affairs that are not in order. Married couples and civil partners can have a combined allowance of €1.2 million. Properties used in tourism or for commercial, agricultural, or industrial purposes are exempt.
However, all properties in Portugal are still subject to Imposto Municipal SobreImóveis (IMI), the Portuguese equivalent of UK council tax, of between 0.3% and 0.8%.
The previous stamp duty tax on residential property valued at over €1 million has been abolished.
Lisbon’s rental yields are good
Apartments in Lisbon continue to obtain good rental yields, ranging from 4.5% to 6.7%, according to the Global Property Guide research. As a reminder, the rental yield is the total percentage return you would earn as a landlord, when renting out your property. Smaller apartments tend to be most profitable. A 50 sq. m. apartment in Lisbon returns around 6.32% rental yields, whereas a 250 sq. m. apartment returns only 4.5% rental yields. Good rental yields are also to be had from villas in Lisbon ranging from 5.45% to 6.05%, and again the rule is the larger the villa, the lower the yield.
Gross rental yields from apartments in Algarve are moderate, ranging from 3.5% to 3.8%. Algarve villas have even poorer rental yields, at around 2.84% to 3.04%.
In Lisbon, rents from apartments range from about €12 to €16 per sq. m. per month, so that a 120 sq. m. apartment can be rented for about €1,578 per month. Villas in Lisbon rent out for around €9 to €11 per sq. m. per month, and a 450 sq. m villa can be rented for around €4,185 per month.
Rents from apartments in the Algarve lower, ranging from around €4 to €6 per sq. m. per month, so you can expect monthly rental income of about €620 from a 120 sq. m. apartment. Villas in the Algarve rent for around €6 to per sq. m. per month, so you can expect monthly rental income of about €2,356 from a 300 sq. m. villa.
In terms of price to rent ratios, Global Property Guide research suggests that Lisbon is exceptionally good value.
Interest rates are astonishingly low
After continuously declining from 2012 to 2015, interest rates on housing loans have been almost unchanged in the past four years. In November 2019, the average interest rate on housing loans stood at 1.05%, slightly down from 1.11% a year earlier.
By maturity (as of November 2019):
- Up to 1 year: 2.51%, down from 2.92% a year earlier
- Over 1 and up to 5 years: 2.51%, down from 2.68% a year earlier
- Over 5 years: 1.05%, slightly down from 1.11% a year ago
The exceptionally low mortgage rates were partly due to the recent rate cuts of the European Central Bank (ECB), from 1.5% in October 2011 to 0.05% in September 2014 and to 0.00% in March 2016.
The Portuguese mortgage market is extremely sensitive to interest rate changes, since about 65% of new mortgage loans issued last year have variable interest rates or initial rate fixation of less than one year, according to the European Mortgage Federation (EMF).
Shrinking mortgage market
Despite very low interest rates, outstanding housing loans declined by 0.1% in November 2019 from a year earlier, to €94.41 billion (US$105.37 billion) or 44.8% of GDP.
Pent-up rental demand - new tenancy law
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 74% in 2013 and finally to about 75% last year.
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 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 €78bn 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 strengthens 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 ArrendamentoUrbano - "NRAU") - an attempt to solve old lease issues.
The new 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.
Landlords felt the new laws were long overdue. According to the President of the Lisbon Property Owners’ Association, Luis MenezesLeitao, foreigners find the old law hard to believe, and he recounts that some people in central Lisbon pay rents as low as €5 a month.
‘Right to Housing’ Law passed
In July 2019, the Parliament passed the Basic Housing Law that creates the legal basis for housing being treated as a citizen’s right, with the government now responsible for ensuring adequate housing for all citizens.
To cushion the impact of surging house prices and eliminate homelessness, the new law forces municipal councils to use public building and housing stock for affordable housing and prohibits tenant evictions until the government can provide substitute housing nearby.
Based on the said law, the first-ever national housing policy will be presented to the Parliament by March 2020.
Modest economic growth; improving finances
The Portuguese economy expanded by a modest 2% in 2019 from a year earlier, after annual rises of 2.4% in 2018, 3.5% in 2017, 2% in 2016, 1.8% in 2015, and 0.8% in 2014, according to the European Commission.
The country’s six years of continued growth comes after a series of dismal years. Portugal’s economy contracted 0.9% in 2013, 4.1% in 2012, and 1.7% in 2011, according to the International Monetary Fund (IMF). In 2010, the economy grew by 1.7%, but in 2009 GDP contracted by 3.1%, after average annual growth of only 1.4% between 2004 and 2008.
The economy is expected to grow by 1.7% annually in the next two years, based on estimates released by the European Commission.
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$87 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 119.5% of GDP in 2019, though this is an improvement on 130.6% in 2014. The public debt is expected to fall to 117.1% of GDP in 2020 and to 113.7% of GDP in 2021.
The country’s fiscal deficit stood at 0.1% of GDP in 2019, sharply down from 0.4% in 2018, 3% in 2017, 1.9% in 2016, 4.4% in 2015 and 7.2% in 2014. In 2020 budget the government envisages a surplus of 0.2% of GDP – the first surplus in the country’s 45 years of democracy.
Inflation stood at 0.4% in December 2019, down from 0.7% in December 2018 and 1.5% two years ago, according to INE. Inflation is expected to accelerate to 1.1% this year and to 1.4% in 2021, based on estimates from the European Commission.
Unemployment was 6.1% in Q3 2019, down from 6.7% in the same period last year and the lowest level in 17 years. Portugal’s jobless rate averaged about 12% from 2010 to 2018. It is expected to fall further to 5.9% this year and to 5.6% in 2021.
- Average value of bank evaluation (€/ m²) of living quarters by Geographic localization (NUTS - 2013) (InstitutoNacional De Estatistica):https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_indicadores&contecto=pi&indOcorrCod=0003971&selTab=tab0
- Conventional dwellings (Housing stock - No.) by Geographic localization (NUTS - 2013) (InstitutoNacional De Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_indicadores&indOcorrCod=0008329&contexto=bd&selTab=tab2
- Economic forecast for Portugal (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/portugal/economic-forecast-portugal_en
- Portugal targets first budget surplus in decades, solid growth (Hellenic Shipping News): https://www.hellenicshippingnews.com/portugal-targets-first-budget-surplus-in-decades-solid-growth/
- Consumer price index (Year-on-year monthly growth rate - Base 2012 - %) by Geographic localization and Special aggregates (InstitutoNacional De Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_indicadores&contecto=pi&indOcorrCod=0002386&selTab=tab0
- Rental yields on both Lisbon District houses and apartments are good. (Global Property Guide): https://www.globalpropertyguide.com/Europe/Portugal/Rental-Yields
- Price/Rent Ratio in Portugal compared to Europe (Global Property Guide): https://www.globalpropertyguide.com/Europe/Portugal/price-rent-ratio
- 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
- Rise in house prices slows down in 2020. Moody’s sees increase of 4% (Eco News): https://econews.pt/2019/12/04/rise-in-house-prices-slows-down-in-2020-moodys-sees-increase-of-4/
- Portugal passes accessible rent law (Essential Business): https://www.essential-business.pt/2019/07/10/portugal-passes-accessible-rent-law/
- Portugal´s parliament passes ‘Right to Housing’ Law as prices surge (Algarve Daily News): https://algarvedailynews.com/news/16763-portugal-s-parliament-passes-right-to-housing-law-as-prices-surge
- World Economic Outlook Database, October 2019 (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/
- Great value and good yields in Portugal, where house prices continue to rise - January 16, 2017
- Portuguese house prices continue to rise as its economy recovers - March 21, 2016