Great value and good yields in Portugal, where house prices continue to rise

January 16, 2017


Portugal’s housing prices continue to rise strongly, amidst improved economic conditions. Property prices in Portugal rose by 3.84% (2.97% in real terms) in October 2016 from a year earlier, to an average price of €1,081 (US$1,130) per square metre (sq. m.), based on figures released by Statistics Portugal (INE). After more than three years of depression, house prices in Portugal started to recover in 2014.

In Lisbon metropolitan area, property prices were up by 2.59% (1.72% in real terms) y-o-y in October 2016, to an average of €1,308 (US$1,367) per sq. m.

House prices rose in all the country’s 24 urban areas. Santa Maria da Feira recorded the highest increase of 12.2% during the year to October 2016, followed by Oeiras (10.4%) and Barcelos (10.4%), Odivelas (9.9%), Porto (9.7%), Villa Franca de Xira (9.6%), Cascais (8.1%), Leiria (7.8%), Loures (7.7%), and Amadora (7.6%).

Strong house price rises were also registered in Sintra (6.6%), Setubal (6.5%), Gondomar (6.2%), Maia (6.2%), Almada (6%), Lisboa (5.3%), Vila Nova de Famalicao (5.1%), and Seixal (5.1%).

Modest to minimal house price increases were seen in Vila Nova de Gaia (4.2%), Funchal (3%), Braga (2.2%), Guimaraes (0.9%), and Coimbra (0.1%).

By property type:

  • Flats prices rose by 3.31% (2.44% in real terms) y-o-y in October 2016
  • Villa prices rose by 4.77% (3.89% in real terms) y-o-y in October 2016

Demand is rising strongly.  Total transactions rose by 15.8% to 31,535 units from a year ago in the third quarter of 2016, according to INE.  “Portugal’s property market is booming once more!" says Chris White of the real estate firm Ideal Homes Portugal.  "Sales have increased hugely this year and we’ve seen a significant shift in buyer profile as increasing numbers of investors realize the potential of the Portuguese real estate sector."

However the government’s plan to increase taxes on high-value real property in 2017 to pay for higher pensions and state worker salaries makes the luxury property market outlook uncertain.

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 economy is believed to have grown by a meagre 1% this year, and by is expected to 1.1% in 2017, after expanding by an average of just 0.2% in the past 15 years, according to the International Monetary Fund (IMF).

President Costa’s plans to raise property taxes

Portugal housing transactions

President Antonio Costa recently suggested that indirect taxes and levies on real property would be raised in 2017 to help pay for higher pensions and the salaries of state workers. The proposed tax measure includes only high-value property, with a market value of above €600,000.

Many oppose the measure.

“Returning money to public workers by increasing property taxes is one of those measures that will immediately scare away investors,” said Peter Villax of the Portuguese Family Business Association in Lisbon. “We need measures that stimulate growth, not half-baked policies that will bring in votes at the expense of much-needed investor confidence in Portugal.”

Antonio Costa, a former Prime Minister and member of the centre-right member of the Social Democratic Party, became President of Portugal in March 2016. While the real power normally resides with the Prime Minister, his election is important because the President can play an important time when, as happened last October, the Parliamentary election results were inconclusive, resulting in a shaky government of moderate centre-left Socialists dependent on far-left parties for support. 

Despite his centre-right opinions, Costa has pledged to reverse state salary cuts and increase indirect taxes, and supports raising the minimum wage and reduce the working week for state workers, and eliminating some measures introduced during the bailout program that ended in 2014.

Property prices in Portugal remain way below peak levels

All regions of Portugal have experienced significant house price falls since late 2007. And despite some recovery in 2009, house prices started to fall again in the last quarter of 2010. Prices only began to recover in Q4 2014, after 13 consecutive quarters of y-o-y house price declines.


  Average price (€/sq. m.) Y-O-Y change (%) M-O-M change (%) Change from peak (%)
PORTUGAL 1,081 3.84 0.46 -8.16
AM Lisboa 1,308 2.59 0.15 -9.73
Norte 954 4.49 0.42 -4.41
Centro 886 4.24 0.68 -10.23
Alentejo 914 0.55 -0.11 -13.53
Algarve 1,358 4.78 -1.24 -7.49
Azores Islands 984 1.34 2.18 -9.89
Madeira 1,205 2.21 3.17 -15.73
Source: Instituto Nacional de Estatistica (INE)

In October 2016, Alentejo was still 11.78% down on its peak, while Centro was down 8.47%. House prices in the AM Lisboa were 6.37% down, and in Algarve 5.89% down. Norte had the lowest price drop from the peak, at just 3.44%.

Portugal average price dwellings euro

In the autonomous regions of Madeira and Azores Islands, house prices remain 15.7% and 9.9% down from the peak, 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: house prices rose by 4.5% y-o-y (4% in real terms).

Why did Portugal miss the boom? Largely because of sluggish economic growth, expanding by an average of just 0.2% in the past 15 years.

In 2009, the economy contracted by 3%. Although it grew by 1.9% in 2010, Portugal’s GDP fell again by an average of 2.5% annually from 2011 to 2013. The economy expanded by 1.5% in 2015, after meagre growth of 0.9% in 2014.

Portuguese property is very inexpensive.

Portugal average price dwellings type

If we were to take account of inflation, these price declines would be larger. Currency falls are another factor. During the past two years (2013-2015), the Euro has fallen by around 21% against the US Dollar, and around 12% against the Sterling.

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 €1,358 per sq. m. in October 2016. It was followed by Lisbon Metropolitan Area and Madeira, with average house prices of €1,308 per sq. m. and €1,205 per sq. m., respectively. Global Property Guide’s Lisbon square metre house price research finds that Lisbon city-centre prices are higher, at around €2,543 per square metre for 120 sq. m. Lisbon apartments in September 2016. On the other hand, a 120 sq. m. apartment in Algarve is priced around €1,786 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).

Lisbon’s rental yields are good

Portugal exchange rates

Lisboa apartments continue to obtain good rental yields, ranging from 5.4% to 6.2%, according to the Global Property Guide rental yields research of September 2016. 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 Lisboa 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 Lisboa ranging from 5.45% to 6.05% in September 2016, 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% in September 2016. Algarve villas have even poorer rental yields, at around 2.84% to 3.04%.

In Lisboa, rents from apartments range from about €12 to €14 per sq. m. per month in September 2016, so that a 120 sq. m. apartment can be rented for about €1,434 per month. Villas in Lisboa 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

Portugal interest rates

Interest rates on housing loans have continuously declined since 2012. Interest rates on housing loans fell to a record low of 1.04% in October 2016, from 1.23% in October 2015, 1.45% in October 2014, 1.42% in October 2013, and 1.84% in October 2012, according to the INE. This was 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 mortgage market is extremely sensitive to interest rate changes, since about 93.2% of new mortgage loans have variable interest rates or initial rate fixation of less than one year, according to the European Mortgage Federation (EMF).

Shrinking mortgage market

Portugal’s mortgage market grew from 41.5% of GDP in 2000 to 65.6% of GDP in 2012. But housing loans have declined for the past five consecutive years (-0.5% in 2011, -3% in 2012, -3.6% in 2013, and -3.9% in both 2014 and 2015), and are expected to have declined again by around 3% in 2016. 

Portugal housing loans

As a result, the mortgage market has shrunk to just around 51% of GDP in 2016.Despite very low interest rates, housing loans declined further by 2.9% in October 2016 from the same period last year, to €95.7 billion.

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 to 74.8% in 2015.

Meanwhile the private rental market has shrunk from 39% of total dwelling stock in 1981, to 20% in 2015. 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 discouraged landlordism by giving tenants controlled rents and protecting them against eviction. As a result, young people either live at home, or pay exorbitant key money, or buy an apartment. This has led to a considerable pent-up demand for rental housing.

Lease law 31/2012 provides more protections to landlords

Law 31/2012, which was passed by the Portuguese government on August 14, 2012, aims give more protection and rights to landlords. Previously, the country’s urban lease regime was strongly pro-tenant. The Portuguese government approved the new legal measure to reform the rental market, 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 specific period for the duration of the 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 (Balcão Nacional 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.

Construction activity rising again

Portugal licensed dwellings

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 recently, there are some signs of recovery. The number of licensed dwellings in new constructions rose by 20.2% to 8,153 units in 2015 from a year earlier. Lisbon (43.6%), Azores Islands (37.8%) and Alentejo (37.5%) had the largest increases in the number of dwelling permits for family housing in 2015 from the previous year. Strong increases were also seen in Norte (19.5%), Algarve (14.7%), and Centro (10.7%). Only Madeira experienced a decline of 20.4% over the same period.

During the first ten months of 2016, the number of licensed dwellings in Portugal surged 36.6% to 9,209 from the same period last year, according to INE.

Economy improving

Portugal gdp inflation

The economy grew by 1.5% in 2015, thanks to an increase in exports, according to the Bank of Portugal. 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.

The economy is expected to grow by 1% this year and by another 1.1% in 2017, according to the IMF.

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$ 88.6 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 129% of GDP in 2015, slightly down from 130.2% of GDP in 2014, according to the European Commission. The country’s public debt is expected to stand at around 130.3% of GDP in 2016 and to 129.5% of GDP in 2017.

Portugal unemployment

The country’s fiscal deficit stands at 4.4% of GDP in 2015, sharply down from 7.2% of GDP the previous year. The deficit is expected to fall further to around 2.7% of GDP this year and to 2.2% of GDP in 2017, according to the European Commission.

Inflation stood at 0.5% in 2015, from a deflation of 0.2% in a year earlier, according to the INE.

Unemployment stood at about 10.8% in October 2016, down from 12.4% during the same period last year. Portugal’s jobless rate averaged about 14.1% from 2011 to 2015, according to the IMF


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