Portugal’s house price rises moderating
Lalaine C. Delmendo | January 25, 2021
Portugal’s housing market remains strong. But the rate of house price increases is now moderating, as the COVID-19 pandemic has adversely affected the country’s overall economy.
During the year to November 2020, residential property prices in Portugal rose by 6.32% (6.56% in real terms) to a median price of €1,144 (US$1,381) per square meter (sq. m) – a sharp slowdown from the previous year’s 11.16% growth, based on 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 4.5% in 2015, 4.8% in 2016, 4.6% in 2017, 6.1% in 2018 and 8.3% in 2019.
In Lisbon metropolitan area, property prices were up by 5.83% (6.06% in real terms) in November 2020 from a year earlier, to a median price of €1,507 (US$1,820) per sq. m.
- In the North, the median property price rose by 6.54% y-o-y in November 2020 (6.77% in real terms), to €994 (US$1,200) per sq. m.
- In the Center, property prices rose by 3.87% y-o-y in November 2020 (4.1% in real terms), to €833 (US$1,006) per sq. m.
- In Alentejo, property prices rose by a modest 2.84% (3.07% in real terms) y-o-y to €833 (US$1,006) per sq. m.
- In Algarve, property prices rose strongly by 7.28% (7.52% in real terms) y-o-y to €1,562 (US$1,886) per sq. m.
- In the Azores, property prices increased 3.41% (3.64% in real terms) y-o-y to €940 (US$1,135) per sq. m.
- In Madeira, the median property price rose by 2.55% (2.77% in real terms) y-o-y to €1,168 (US$1,410) per sq. m. in November 2020
By property type, apartment prices rose by 7.1% (7.34% in real terms) while house prices increased 4.61% (4.84% in real terms).
Demand has weakened due to the pandemic. During the first three quarters of 2020, the total number of housing transactions in Portugal fell by 7.7% y-o-y to 122,066 units while the value of transactions was almost steady at €18.65 billion (US$22.52 billion), according to INE. This is in contrast to annual growth of 1.6% in 2019, 16.6% in 2018, 20.6% in 2017, 18.5% in 2016, and 27.4% in 2015.
Construction activity is mixed. Licensed dwelling permits fell by 1.3% y-o-y to 24,031 units in the first eleven months of 2020, in contrast to annual average growth of 28% from 2015 to 2019. Completions, which may have already been started before the pandemic, increased more than 25% y-o-y to 12,604 units in the first three quarters of 2020.
The Portuguese economy contracted by a huge 8.1% 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, according to the Banco de Portugal. The International Monetary Fund (IMF) and the European Commission (EC) are more pessimistic, believing that the economy has declined by 10% and 9.3%, respectively.
The economy is expected to grow by 3.9% this year and by another 4.5% in 2022, based on the projections released by Banco de Portugal.
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 falling
During the first three quarters of 2020, the total number of housing transactions in Portugal fell by 7.7% y-o-y to 122,066 units while the value of transactions was almost steady at €18.65 billion (US$22.52 billion), according to INE.
In Q1-Q3 2020:
- Existing dwellings: the number of transactions fell by 9% y-o-y to 102,809 units while transactions value dropped 2.2% y-o-y to €14.75 billion (US$17.81 billion).
- New dwellings: the number of transactions fell slightly by 0.1% y-o-y to 19,257 units while transactions value increased 9.3% y-o-y to €3.9 billion (US$4.72 billion).
By region, Algarve had the biggest decline in the number of housing transactions, registering a y-o-y decline of 13.1% in the first three quarters of 2020, followed by AM Lisbon (-9.9%), Norte (-7%), Centro (-5%), and Alentejo (-0.9%)
In the autonomous regions of Azores Islands and Madeira, housing transactions also fell by 8.2% and 3.3%, respectively.
Construction activity mixed
After a long slump in construction activity, 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 22.4% to 14,143 units in 2017, by 43.2% to 20,259 units in 2018 and by another 18.6% y-o-y to 24,031 units in 2019.
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, by 33.8% to 11,440 units in 2018, and by another 24% to 14,190 units in 2019.
However due to the pandemic, new construction weakened last year, and licensed dwelling permits fell slightly by 1.3% y-o-y to 24,031 units in the first eleven months of 2020. Algarve had the biggest annual decline of almost 27% in Jan-Nov 2020 from a year earlier, followed by AM Lisbon (-8.2%), Alentejo (-6.3%), and Azores Islands (-4.9%). In contrast, licensed dwelling permits continue to rise in Madeira (11.3%), Centro (6.2%), and Norte (3.4%).
Completions, which largely started before the pandemic, increased more than 25% to 12,604 units in the first three quarters of 2020 from a year earlier.
Total dwelling stock was 5,968,354 units in the beginning of 2020, up slightly by 0.2% from a year earlier, according to INE.
House prices already 30% above pre-recession levels
As of November 2020, Portugal’s nationwide house prices were almost 30% 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 35% above its previous peak. Also, house prices in both Algarve and the North are now more than 30% up. House prices in the Centre and the Azores Islands are up by 14% and 9%, respectively.
On the other hand, house prices in Alentejo and the autonomous region of Madeira are now slightly above their previous peak.
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),
- 2018: house prices rose by 6.1% y-o-y (5.4% in real terms), and;
- 2019: house prices rose strongly by 8.3% y-o-y (7.8% 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 2.8% 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 €1,562 (US$1,886) per sq. m in November 2020. It is followed by Lisbon Metropolitan Area and Madeira, with median house prices of €1,507 (US$1,820) per sq. m. and €1,168 (US$1,410) 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$3,019) 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$2,174) 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 are astonishingly low
After continuously declining from 2012 to 2015, interest rates on housing loans have been almost unchanged in the past five years. In November 2020, the average interest rate on housing loans stood at 1.02%, slightly down from 1.05% a year earlier.
By maturity (as of November 2020):
- Up to 1 year: 2.12%, down from 2.51% a year earlier
- Over 1 and up to 5 years: 2.28%, down from 2.51% a year earlier
- Over 5 years: 1.02%, slightly down from 1.05% 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).
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 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 44.2% of GDP in 2019. Though in 2020, the size of the mortgage market relative to GDP is expected to increase to about 49%, mainly because of a sharp contraction in the size of Portugal’s economy due to the pandemic.
In November 2020, housing loans outstanding increased slightly by 1.6% y-o-y to €95.9 billion (US$115.8 billion).
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 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 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 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 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 in 2020 its 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$1,208) 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.
‘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.
The first-ever national housing policy of Portugal is expected to be passed this year to operationalize the law.
Sharp economic contraction
The Portuguese economy is estimated to have contracted by a huge 8.1% 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, according to the Banco de Portugal. The International Monetary Fund (IMF) and the European Commission (EC) are even more pessimistic, projecting declines of 10% and 9.3%, respectively.
The economy is expected to grow by 3.9% this year and by another 4.5% in 2022, based on the projections released by Banco de Portugal. The country saw six years of continued growth from 2014 to 2019 after a series of dismal years.
After registering a slight surplus of 0.1% of GDP in 2019 (the first surplus in the country’s 45 years of democracy), the country recorded another 7.3% budget deficit in 2020, amidst the introduction of pandemic-related stimulus aids, based on the EC’s estimates.
As a result, Portugal’s already massive public debt burden soared further to around 135.1% of GDP in 2020, a sharp rise from 117.2% in 2019. The public debt is expected to fall to 130.3% of GDP in 2021 and to 127.2% of GDP in 2022.
Inflation stood at -0.2% in December 2020, down from 0.4% in December 2019 and from 0.7% two years ago, according to INE. Inflation is expected to accelerate to 0.9% this year and to 1.2% in 2022, based on estimates from the European Commission.
Unemployment, which has been falling steadily since 2013, increased to 8% in 2020 from 6.5% in 2019, according to the EC. It is expected to fall back to 7.7% this year and to 6.6% in 2022.
- Bank appraisals increased 13 Euros to 1,144 Euros per square meter - November 2020 (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=415145593&DESTAQUESmodo=2
- House prices decelerated to 7.1% - 3rd Quarter 2020 (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=415295136&DESTAQUESmodo=2
- Conventional dwellings (Housing stock - No.) by Geographic localization (NUTS - 2013) (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_indicadores&indOcorrCod=0008329&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
- 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 2020: A Review of Europe’s Mortgage and Housing Markets (European Mortgage Federation): https://hypo.org/app/uploads/sites/2/2020/12/HYPOSTAT-2020-FINAL.pdf
- Price/Rent Ratio in Portugal compared to Europe (Global Property Guide): https://www.globalpropertyguide.com/Europe/Portugal/price-rent-ratio
- 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
- COVID-19: Portuguese Government draft bill establishes an exceptional regime for deferral of rental payments (Garrigues): https://www.garrigues.com/en_GB/new/covid-19-portuguese-government-draft-bill-establishes-exceptional-regime-deferral-rental
- World Economic Outlook Database, October 2020 (International Monetary Fund): https://www.imf.org/en/Publications/WEO/weo-database/2020/October/select-subjects?c=182,
- Completed dwellings (No.) in new constructions for family housing by Geographic localization (NUTS - 2013); Quarterly (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_indicadores&indOcorrCod=0003841&contexto=bd&selTab=tab2
- Bank of Portugal sees 3.9% economic growth in 2021, below govt forecast (Reuters): https://www.reuters.com/article/portugal-economy-cenbank/update-1-bank-of-portugal-sees-3-9-economic-growth-in-2021-below-govt-forecast-idUSL8N2IU4R6
- Economic projections (Banco de Portugal): https://www.bportugal.pt/en/page/projecoes-economicas
- 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
- ´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
- 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