Portugal’s house price rises moderating
Lalaine C. Delmendo | January 17, 2022
Portugal’s housing market is now strengthening, thanks to a sharp recovery in demand amidst improving economic conditions.
During the year to October 2021, the median price of dwellings in Portugal surged 10.61% (8.63% in real terms) to €1,251 (US$1,414) per square meter (sq. m) – almost twice the y-o-y growth of 5.8% recorded in October 2020, according to figures released by the Instituto Nacional de Estatistica (INE).
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 and 6% in 2020.
In Lisbon metropolitan area, property prices were up by 10.31% (8.33% in real terms) in October 2021 from a year earlier, to a median price of €1,659 (US$1,876) per sq. m.
- In the North, the median property price rose strongly by 9.16% y-o-y in October 2021 (7.21% in real terms), to €1,084 (US$1,226) per sq. m.
- In the Center, property prices rose by 6.15% y-o-y in October 2021 (4.25% in real terms), to €880 (US$996) per sq. m.
- In Alentejo, property prices rose by 5.69% (3.8% in real terms) y-o-y to €873 (US$988) per sq. m.
- In Algarve, property prices rose by 7.94% (6% in real terms) y-o-y to €1,673 (US$1,893) per sq. m.
- In the Azores, property prices increased 2.04% (0.21% in real terms) y-o-y to €951 (US$1,076) per sq. m.
- In Madeira, the median property price rose strongly by 9.54% (7.58% in real terms) y-o-y to €1,286 (US$1,455) per sq. m. in October 2021
By property type, apartment prices rose by 11.78% (9.78% in real terms) while house prices increased 6.65% (4.74% in real terms).
Demand is recovering strongly. During the first three quarters of 2021, the total number of housing transactions in Portugal rose by 25.4% y-o-y to 153,076 units while the value of transactions increased 33.3% to €24.86 billion (US$28.16 billion), according to INE. All regions saw double-digit transaction increases over the same period. This is in contrast to a 5.3% decline during 2020.
Construction activity is rising. Licensed dwellings in new constructions for family housing rose by 12.5% y-o-y to 23,348 units in the first ten months of 2021, according to the INE. Algarve saw the biggest increase in construction activity of 43% y-o-y in Jan-Oct 2021, followed by Alentejo (17.9%), Lisbon AM (15.2%), and Norte (12.7%). Other regions saw modest increases, including Centro (2.9%), autonomous regions of Azores Islands (4.1%) and Madeira (4.3%).
The Portuguese economy contracted by a huge 8.4% in 2020 from a year earlier, following expansions of 2.2% in 2019, 2.6% in 2018, 3.5% in 2017, and 2% in 2016, amidst the coronavirus outbreak. The Banco de Portugal expects the economy to return to growth this year, with a projected real GDP growth of 4.8% – but still not enough to return to its pre-pandemic level. Projections from the International Monetary Fund (IMF) and the European Commission (EC) are even more conservative, projecting modest growth of 4.4% and 4.5%, respectively.
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.
Demand is rising again
During the first three quarters of 2021, the total number of housing transactions in Portugal rose by 25.4% y-o-y to 153,076 units while the value of transactions increased 33.3% to €24.86 billion (US$28.16 billion), according to INE.
In Q1-Q3 2021:
- Existing dwellings: the number of transactions rose by 26.9% y-o-y to 130,509 units while transactions value surged 36.3% to €20.11 billion (US$22.78 billion).
- New dwellings: the number of transactions increased 17.2% y-o-y to 22,567 units while transactions value rose by 21.7% y-o-y to €4.75 billion (US$5.38 billion).
By region, Alentejo had the biggest surge in the number of housing transactions, registering a y-o-y increase of 35% in the first three quarters of 2021, followed by Centro (28.7%), Algarve (26.8%), Norte (24%), and AM Lisbon (22.1%).
In the autonomous regions of Madeira and Azores Islands, housing transactions also increased 38.6% and 18.2%, respectively.
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.
Dwelling completions have followed a similar pattern, rising by 8.8% y-o-y to 7,565 units in 2016, by 5.9% to 8,011 units in 2017, by 3o.5% to 10,454 units in 2018, and by another 25.2% to 13,092 units in 2019.
Despite the pandemic, licensed dwelling permits still managed to hold up, rising slightly by 0.7% y-o-y to 25,083 units during 2020. Madeira had the biggest annual increase of more than 28% in 2020 from a year earlier, followed by Norte (6.3%), and Centro (6%). In contrast, licensed dwelling permits fell in Algarve (-23.1%), Alentejo (-8.4%), AM Lisbon (-8%) and Azores Islands (-2.7%).
Completions, which largely started before the pandemic, increased more than 27.6% to 16,719 units during 2020.
Total dwelling stock was 5,970,655 units during 2020, recording a marginal increase from a year earlier, according to INE.
House prices already 40% above pre-recession levels
As of October 2021, Portugal’s nationwide house prices were about 40% 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.
By region, AM Lisbon’s house prices are now about 50% above its previous peak. Also, house prices in both Algarve and the North are now more than 40% up. House prices in the Centre are up by 20%. In Alentejo, prices are now above their previous peak by about 7%.
Likewise, house prices in the autonomous regions of Azores Islands and Madeira are up about 11% and 13%, 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:
- 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).
Why did Portugal miss the boom? Largely because of 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.
Portuguese property is very inexpensive.
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 a median house price of €1,673 (US$1,892) per sq. m in October 2021, according to figures from INE. It is followed by Lisbon Metropolitan Area and Madeira, with median house prices of €1,659 (US$1,876) per sq. m. and €1,286 (US$1,455) 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$2,831) 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$2,038) 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).
Homebuyers shrug off new wealth tax
The new wealth tax introduced in 2017 had a negligible impact on the luxury housing market.
Officially called Adicional Imposto Municipal Sobre Imóveis (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 are 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 remain low
After continuously declining from 2012 to 2015, interest rates on housing loans have been almost unchanged in the past six years. In October 2021, the average interest rate on housing loans stood at 0.87%, slightly down from 1.04% a year earlier.
By maturity (as of October 2021):
- Up to 1 year: 2.46%, down from 3.04% a year earlier
- Over 1 and up to 5 years: 5.55%, up from 4.67% a year earlier
- Over 5 years: 0.86%, down from 1.03% 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, where it remained since.
The Portuguese mortgage market is extremely sensitive to interest rate changes, since about 65% 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).
Mortgage market steady
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 eight consecutive years by an annual average of 2.4% from 2012 to 2019.
As a result, the mortgage market has shrunk to just around 43.8% of GDP in 2019. Though in 2020, the size of the mortgage market relative to GDP increased grew to about 48.1%, mainly due to a modest increase in credit, coupled with a sharp contraction in the size of Portugal’s economy due to the pandemic.
“Home loans accelerated in 2020, despite the lower growth in household disposable income and the uncertainty regarding macroeconomic perspectives,” said the EMF.
In October 2021, housing loans outstanding increased 2.3% y-o-y to €97.52 billion (US$110.41 billion), according to the ECB.
Pent-up rental demand – the tenancy law 31/2012
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 about 75% in recent years.
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 €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 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 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 Menezes Leitao, 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.
Lisbon tourist flats to be turned into affordable rental homes
In recent years, an increasing number of locals found themselves priced out as Airbnb-style tourist rentals surged to a third of the properties across the city centre of Lisbon. That was until the COVID-19 pandemic brought tourism to a standstill.
To tackle the affordable housing problem in the city, the local government of Lisbon unveiled last year an ambitious plan, called Renda Segura to convert some of the city’s more than 20,000 short-term vacation rental flats into affordable housing. The initiative will offer landlords the option of renting their properties to the city in exchange of up to €1,000 (US$1,132) monthly income for a minimum of five years. In turn, the city will rent the homes to tenants, especially young people and lower income families, at a subsidized rate capped at a third of the net income of the household.
“In a certain sense Covid has created an opportunity,” said Lisbon mayor Fernando Medina. “The virus didn’t ask us for permission to come in, but we have the ability to use this time to think and to see how we can move in a direction to correct things and put them on the right track.”
The city’s offer to pay an advance payment of as much as three years’ rent is expected to entice many landlords as they struggle with the uncertainty brought by the pandemic.
Recently, Lisbon mayor Fernando Medina reiterated again his desire to “get rid of Airbnb” once the coronavirus pandemic is over.
The Portuguese economy contracted by a huge 8.4% in 2020 from a year earlier, following expansions of 2.2% in 2019, 2.6% in 2018, 3.5% in 2017, and 2% in 2016, amidst the coronavirus outbreak.
The Banco de Portugal expects the economy to grow by 4.8% this year – still not enough to return to its pre-pandemic level. Projections from the International Monetary Fund (IMF) and the European Commission (EC) are even more pessimistic, projecting modest growth of 4.4% and 4.5%, respectively.
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. Portugal is projected to record a shortfall of 4.5% of GDP in 2021.
As a result, Portugal’s already massive public debt burden soared further to around 135.2% of GDP in 2020, a sharp rise from 117.2% in 2019. Public debt is expected to fall to 128.1% of GDP in 2021 and to 123.9% of GDP in 2022.
Inflation accelerated to 2.58% in November 2021, sharply up from 1.83% in the previous month and -0.22% a year, according to INE. In fact, it was the highest level in almost nine years. Inflation slowed to an average of 0.5% annually from 2013 to 2020, from 2.6% in 2000-2012.
Unemployment, which has been falling steadily since 2013, increased to 7% in 2020 from 6.6% in 2019. It is expected to fall slightly to 6.9% this year and to 6.7% in 2022, according to the IMF.
- Bank appraisals increased to 1,251 euros per square meter - October 2021 (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=472518586&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
- Conventional dwellings (No.) by Geographic location and Occupacy status; Decennial (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_indicadores&contecto=pi&indOcorrCod=0011156&selTab=tab0
- Completed dwellings (No.) in new constructions for family housing by Geographic localization (NUTS - 2013) and Investing entity; Annual (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_indicadores&indOcorrCod=0008322&contexto=bd&selTab=tab2
- Rental yields on both Lisbon District houses and apartments are good. (Global Property Guide): https://www.globalpropertyguide.com/Europe/Portugal/Rental-Yields
- House Prices/GDP per Capita in Portugal compared to Europe (Global Property Guide): https://www.globalpropertyguide.com/Europe/Portugal/price-gdp-per-cap
- 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
- Hypostat 2021: A Review of Europe’s Mortgage and Housing Markets (European Mortgage Federation): https://eurodw.eu/wp-content/uploads/HYPOSTAT-2021_vdef.pdf
- ´Covid created an opportunity´: Lisbon to turn tourist flats into homes. (The Guardian): https://www.theguardian.com/world/2020/dec/01/covid-created-an-opportunity-lisbon-turns-20000-tourist-flats-into-homes
- Lisbon Has a Plan to Reclaim Housing From Airbnb (Bloomberg): https://www.bloomberg.com/news/articles/2020-07-08/lisbon-s-plan-to-reclaim-vacation-rentals-for-housing
- Lisbon Wants To Get Rid Of Airbnb Once The Pandemic Is Over (Apartments Apart): https://apartmentsapart.com/lisbon-wants-to-get-rid-of-airbnb-once-the-pandemic-is-over/
- Economic Projections (Banco de Portugal): https://www.bportugal.pt/en/page/projecoes-economicas
- 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 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
- 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