Increase in property demand
Lalaine C. Delmendo | March 20, 2022
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.
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.
Analysis of Portugal Residential Property Market »
Rental yields on Lisbon apartments good, ranging from 5.4% to 6.2%
Lisbon's property market is now reasonably priced. Comparatively speaking, Lisbon housing prices are among Europe's lowest:
- an 85 square metres (sq. m.) Lisbon apartment in an elite area may cost around EUR 200,000 to buy.
- a 120 sq. m. Lisbon apartment may cost around EUR 300,000 to buy.
- a 250 sq m. Lisbon apartment may cost around EUR 840,000
How much will you earn? Apartment yields in Lisbon District range from 4.5% to 6.7%, with smaller apartments earning proportionately more. These are good yields and the purchase price is attractive for a European capital city, though Lisbon is hardly at the centre of things. Villas in Lisbon have similar gross rental yields.
Cascais apartments can generate excellent returns at 6.7%, while houses in Oeiras can generate surprisingly good returns at 6.15%
In Faro, Algarve, a 120 sq. m. apartment costs on average EUR 1,870 per sq. m., or EUR 215,000. Apartments in Faro return rental yields of around 4.5%.
Our rental yields figures assume long-term lets; short-term rentals may earn higher returns.
Conclusion: after many years on the back-burner, Lisbon is looking good. Tourist interest in the centre of Lisbon is enormous, so the option of letting via Airbnb is there for much of the year. Lisbon's rental yields are comparatively among the highest in Europe, and Lisbon's price to rent ratios are among Europe's lowest.
Round trip transaction costs can be high in Portugal. See our property transaction costs analysis for Portugal and Property transaction costs in Portugal, compared to the rest of Europe.
Taxes range from moderate to high in Portugal
Rental Income: Net rental income is taxed at a flat rate of 28%, withheld by the tenant. Repairs, maintenance expenses, and local taxes are deductible from the gross rent.
Capital Gains: Net capital gains are taxed at a flat rate of 28% in Portugal. Acquisition costs are deducted from the gross selling price of the property.
Inheritance: There are no inheritance and gift taxes in Portugal.
Residents: Resident individuals' worldwide income is subject to progressive tax rates, from 14.50% to 48%.
Buying costs in Portugal are moderate
Roundtrip transaction costs, i.e., the cost of buying and selling a property, range from 5.69% to 20.15%. Significant costs include the real estate agent’s fee (3% to 5%, plus 23% VAT), transfer tax (0% to 10%) and legal fees (1% to 2%).
Portuguese law is strongly pro-tenant
The law in Portugal is still strongly pro-tenant, despite substantial changes brought by the New Urban Lease Act.
Rent: The amount of the rent can usually be freely agreed between the parties, with the exception of low cost housing. Rent reviews can also be freely agreed (although they must take place annually), and, with careful drafting, cost-of-living rent increases and suchlike can be agreed.
Tenant Security: The parties may stipulate fixed-term contracts, but they must have a minimum initial term of five years, and there are automatic and consecutive extensions of three years. In the absence of such a fixed term stipulation, the lease agreement will be considered open-ended. Open ended contracts were previously much like ‘tenancy for life’ agreements and are very difficult to terminate.
Strong economic growth in 2022, but sharp slowdown aheadThe 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.