Portugal's Residential Property Market Analysis 2024

Portugal's house prices continue to increase, despite falling demand and rapidly slowing economy. During the year to April 2024, the median price of dwellings in Portugal rose by 7.04% to €1,596 (US$1,732) per square meter (sq. m), according to data released by the Instituto Nacional de Estatistica (INE). Dwelling prices have been continuously rising strongly in the past several years - increasing by about 9.2% annually from 2017 to 2023.

However, when adjusted for inflation, nationwide dwelling prices have increased by a more modest 4.74% y-o-y in April 2024.

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, 11.2% in 2021, and 13.5% in 2022. In 2023, house prices continued to increase, albeit at a slower pace of 5.4%.

In Grande Lisboa, property prices were up by 4.9% (2.6% in real terms) in April 2024 from a year earlier, to a median price of €2,333 (US$2,532) per sq. m.

By region:

• In the North, the median property price rose by 9.1% y-o-y in April 2024 (6.7% in real terms), to €1,371 (US$1,488) per sq. m.

• In the Center, property prices were up strongly by 11% y-o-y in April 2024 (8.6% in real terms), to €1,084 (US$1,177) per sq. m.

• Oeste e Vale do Tejo saw a house price growth of 12.4% (10% in real terms) y-o-y to €1,211 (US$1,314) per sq. m.

• In Península de Setúbal, residential property prices rose by 6% (3.7% in real terms) y-o-y to €1,818 (US$1,973) per sq. m.

• In Alentejo, property prices rose strongly by 13.4% (10.9% in real terms) y-o-y to €1,120 (US$1,216) per sq. m.

• In Algarve, the average property price rose by a meager 1.3% y-o-y (and actually dropped by 0.9% in real terms) to €2,110 (US$2,290) per sq. m. in April 2024.

• Azores Islands registered the biggest property price growth of 19.7% (17.1% in real terms) y-o-y to €1,269 (US$1,377) per sq. m.

• In Madeira, the median property price also increased by a huge 16.8% (14.3% in real terms) y-o-y to €1,796 (US$1,949) per sq. m. in April 2024.

By property type, apartment prices rose by 6.1% y-o-y to €1,769 (US$1,920) per sq. m. in April 2024 while house prices increased by 9.8% to €1,248 (US$1,355) per sq. m.

The continued rise in house prices is surprising given the sharp decline in property demand. During 2023, the total number of housing transactions in Portugal fell sharply by 18.7% to 136,499 units from a year earlier, following y-o-y increases of 1.3% in 2022 and 20.5% in 2021, according to INE figures. All regions registered a decline in housing transactions.

The residential construction sector remains robust. During 2023, licensed dwellings increased further by 6% y-o-y to 32,053 units, according to INE figures. Likewise, dwelling completions also rose by 6.8% y-o-y to 21,534 units in 2023.

Portugal's economic growth slowed sharply to 2.3% in 2023 from a year earlier, according to the country's statistical agency, following strong expansions of 6.8% in 2022 and 5.7% in 2021, signaling a broad-based slowdown in activity across major sectors. Then in Q1 2024, the Portuguese economy grew by a meager 1.4% from a year earlier - its worst showing since Q1 2021. This was mainly due to a slowdown in private spending and investment.

The economy is expected to slow further this year, with a projected real GDP growth rate of just 1.7% this year, before improving slightly to a 1.9% growth in 2025, based on European Commission forecast. On the other hand, the Banco de Portugal expects the economy to expand by 1.2% in 2024 and by 2.1% next year.

Demand is now falling rapidly

During 2023, the total number of housing transactions in Portugal fell sharply by 18.7% to 136,499 units from a year earlier, following y-o-y increases of 1.3% in 2022 and 20.5% in 2021, according to INE figures.

In 2023:

• Existing dwellings: the number of transactions declined by a huge 21.4% y-o-y to 108,380 units, after registering a slight fall of 0.1% in 2022 and a strong growth of 22.1% in 2021.

• New dwellings: the number of transactions fell by 6.1% y-o-y to 28,119 units, following robust increases of 8.5% in 2022 and 12.9% in 2021.

By region, Península de Setúbal had the biggest decline in the number of transactions, registering a y-o-y fall of 25.2% in 2023, followed by Algarve (-24.6%), and Grande Lisboa (-22.1%). Housing transactions had also fallen in Alentejo (-17.8%), Oeste e Vale do Tejo (-17.4%), Norte (-16%), and Centro (-11.8%).

In the autonomous regions of Madeira and the Azores Islands, housing transactions also dropped last year by 20.4% and 19%, respectively.

There are no restrictions on foreign property ownership in Portugal and transaction costs are generally low.

Under Portugal's Golden Visa Program, the country grants a 5-year residency permit to non-EU citizens who invest in the country, including those who buy a minimum of €500,000 worth of property, allowing holders to work or study, and travel to Schengen countries. They could then apply for permanent residency after five years.

However the program went through significant changes recently, and in November 2023, the government announced that it no longer accepts the purchase of real estate or real estate-related funds as qualifying investment.

Construction activity continues to grow

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.

The growth in residential construction activity slowed in 2020 due to the adverse impact of the pandemic, with licenses rising by just 5.07% y-o-y to 26,168 units. Activity improved again in 2021, with the number of licensed new constructions increasing by 12% to 29,312 units. Then in 2022, licensed dwellings rose by a modest 3.2% y-o-y to 30,247 units - the first time that it crossed the 30K mark in 14 years.

During 2023, licensed dwellings increased further by 6% y-o-y to 32,053 units, according to INE figures.

Dwelling completions have followed a similar pattern, rising continuously from 2016 to 2021, registering an average growth of 19.2% annually. Completions continued to increase in recent years, albeit at a much slower pace - by 3% y-o-y to 20,156 units in 2022 and by 6.8% y-o-y to 21,534 units in 2023.

Total dwelling stock was 6,002,874 units during the start of 2022, recording a marginal increase of 0.3% from a year earlier, based on the latest figures released by the INE. The northern region accounted for 31.7% of the total stock, followed by AM Lisbon (with a 25.2% share) and the central region (with a 24.7% share).

House prices are already more than 77% above pre-recession levels

As of April 2024, Portugal's nationwide house prices were about 77% 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. Despite the Covid-19 pandemic, house prices continued to rise in the past four years.

By region, Grande Lisboa's house prices are now about 94% above their previous peak. Also, house prices in Península de Setúbal are now almost 91% up while they are more than 82% up in the North. In Algarve, house prices are already more than 79% above their previous peak.

In Oeste e Vale do Tejo and Centro, prices are up by 57% and 53%, respectively. House prices in Alentejo are now above their previous peak by 33%.

Likewise, house prices in the autonomous regions of Madeira and the Azores Islands are up by about 58% and 47%, respectively.

The house price boom that swept most of Europe and the developed world from the mid-1990s to 2006 completely bypassed Portugal, except in the Algarve. One of the reasons is the country's 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. After experiencing a pandemic-induced contraction of 8.3% in 2020, the economy grew robustly by an average of 6.3% annually in 2021-22. Yet growth slowed sharply to 2.3% in 2023.

Surprisingly, the Portuguese housing market showed increased resilience in the past several years, with house price growth accelerating despite the Covid-19 pandemic.

• 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).

• 2021-2022: house price growth accelerated to reach an annual growth of 12.3% (5.9% in real terms).

• 2023: house prices continued to increase, albeit at a much slower pace of 5.4% (3.9% in real terms).

Portuguese property is relatively inexpensive

From the perspective of the foreign buyer, Portuguese property is astonishingly good value, despite the recent house price increases. Grande Lisboa, which includes the capital and prime city of Portugal, had the most expensive housing in the country, with a median house price of €2,312 (US$2,509) per sq. m in March 2024, according to figures from INE. It is followed by Algarve, which is known for its Mediterranean beaches and golf resorts, with a median house price of €2,109 (US$2,289) per sq. m.

In contrast, Centro and Alentejo have the cheapest housing in the country, with median house prices of €1,074 (US$1,166) per sq. m and €1,106 (US$1,200) per sq. m, respectively.

Portugal's house price to GDP per capita ratio is one of the lowest in Europe. Again, in terms of square meter prices, Portugal has some of the lowest prices for city-center properties in Europe.

Interest rates remain high

After staying more or less steady in the past six years, interest rates on housing loans have risen rapidly since last year. In March 2024, the average interest rate on new housing loans drawn stood at 3.68%, slightly down from 4% in the previous year but sharply up from just 1.04% two years ago.

By initial rate fixation (IRF), as of March 2024:

• Floating rate & IRF of 1 year: 4.61%, sharply up from 3.81% a year earlier and 0.74% two years ago

• IRF of 1-5 years: 3.47%, up from 3.41% in March 2023 and 0.85% in March 2022

• IRF of 5-10 years: 4.93%, slightly down from 5.05% a year earlier but still up from 3.57% two years ago

• IRF of over 10 years: 3.95%, down from 4.22% in the same period last year but still up from 2.52% two years earlier

The rapid rise in mortgage rates in Portugal was partly due to the recent rate hikes of the European Central Bank (ECB). After holding the repo rate unchanged for more than six years at a record low of 0.00%, the ECB raised it ten consecutive times since July 2022, reaching 4.50% in November 2023, where it remained since.

The Portuguese mortgage market is extremely sensitive to interest rate changes, since more than 60% 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. However, housing loans have declined for the succeeding nine consecutive years, falling by an annual average of 2.2% from 2011 to 2019. As a result, the size of the mortgage market has shrunk to just around 43.8% of GDP in 2019, based on figures by the Global Property Guide.

The total volume of housing loans increased gradually again in the succeeding three years, but the size of the mortgage market relative to GDP continued to decline, which indicates that the overall economy is growing faster than the mortgage market. During 2022, the mortgage market contracted to about 42% of GDP.

As interest rates surge, housing loans fell, resulting to a further contraction in the size of the mortgage market to just 37.8% of GDP in 2023.

In March 2024, housing loans outstanding in Portugal fell slightly by 0.7% y-o-y to €100.52 billion (US$109.1 billion), according to the ECB.

Rental yields are moderately good

Apartments in Portugal continue to obtain moderately good rental yields, ranging from 3% to 11.1%, with a nationwide average of 5.65% in Q4 2023, according to recent research conducted by the Global Property Guide in December 2023. These are good yields and the purchase price is attractive for a European capital city.

As a reminder, the rental yield is the total percentage return you would earn as a landlord when renting out your property.

In Lisbon, the capital and largest city of Portugal, gross rental yields for apartments range from 3.02% to 11.08%, with a city average of 5.65% in Q4 2023.

In Porto, the country's second-largest city and the commercial and industrial hub for the zone north of the Mondego River, apartments can generate returns between 3.61% and 6.47%, with a city average of 5.59%. As a disclaimer, Porto's numbers may be somewhat inconsistent due to a limited supply of rental units. This is possibly due to Portugal's Golden Visa program.

Apartments in Faro offer rental yields of around 4.62% in Q4 2023. Aveiro has a higher average return of 5.56%; Braga's average yield is 5.43%; and Setubal generates rental yields of 7.04%, on average.

In Lisbon, a studio-type apartment rents for about €1,200 per month in Q4 2023, according to the Global Property Guide. One- to two-bedroom apartments are offered in the market for a monthly rent of around €1,500 to €2,000. Three-bedroom apartments are rented for an average of €2,500 per month while apartments with four or more bedrooms are rented for at least €3,700 per month.

In terms of price-to-rent ratios, Global Property Guide research suggests that Lisbon is exceptionally good value. However, round-trip transaction costs can be high in Portugal.

Small rental market, changes in tenancy laws

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 an average of about 75% from 2004-2023. It reached an all-time high of 78.3% in 2021. Currently, the owner-occupation in Portugal stand at about 77.8%, according to Eurostat figures.

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 the 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 €78-billion bailout agreement from the IMF, ECB, and European Commission.

Changes in the law include the following:

• The legislation allows parties to agree on any 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) the 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 the 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 neighboring 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 rent 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) 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 amend Law 6/2006 or the New Urban Lease Act (Novo Regime de Arrendamento Urbano - "NRAU") - an attempt to solve old lease issues.

The legislation also includes a special procedure for 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.

Several other laws came into force after, including Law No. 13/2019 and the Cristas Law of February 2020, which aims to correct the imbalance situations between tenants and landlords, enhance the security and stability in urban letting, and protect tenants in a particularly vulnerable situation. More particularly, they grant tenant protection from harassment of the landlord during the lease period.

Economic growth slowing, but government finances continue to improve

Portugal's economic growth slowed sharply to 2.3% in 2023 from a year earlier, according to the country's statistical agency, following strong expansions of 6.8% in 2022 and 5.7% in 2021, signaling a broad-based slowdown in activity across major sectors.

"Economic growth slowed down to 2.3% in 2023, reflecting a broad-based deceleration across all main GDP components. The main slowdown took place in the second and third quarters of 2023, followed by a rebound in the final quarter of the year," said the European Commission. "Both private consumption and investment increased substantially in the final quarter of the year, helped by the stabilisation in interest rates."

The economy is expected to slow further this year, with a projected real GDP growth rate of just 1.7% this year, before improving slightly to a 1.9% growth in 2025, based on European Commission forecast. On the other hand, the Banco de Portugal expects the economy to expand by 1.2% in 2024 and by 2.1% next year.

In Q1 2024, the Portuguese economy grew by a meager 1.4% from a year earlier - its worst showing since Q1 2021. This was mainly due to a slowdown in private spending and investment.

Before the COVID-19 pandemic, the country saw six years of continued growth from 2014 to 2019 after a series of dismal years. However in 2020, the economy plunged again by a huge 8.3%, its biggest decline in recent history.

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 0.3% of GDP in 2022. During 2023, the country recorded a budget surplus equivalent to 1.2% of GDP. The country is projected to remain in surplus in the next two years.

"Portugal's general government balance improved to a surplus of 1.2% of GDP in 2023. Government revenue benefited from the outstanding performance of tax revenue and social contributions underpinned by dynamic economic activity, high inflation and a robust labour market," said the European Commission. "Government expenditure growth was comparatively muted, thanks to the complete phase-out of COVID-19 temporary emergency measures and the reduced net budgetary impact of measures to mitigate the impact of high energy prices," the Commission added.

Portugal's public debt also improved, falling to about 99.1% of GDP in 2023, from 112.4% of GDP in 2022, 124.5% in 2021 and 134.9% in 2020. It is expected to fall further to 95.6% of GDP this year and to 91.5% of GDP next year.

As a result of improving public finances, Fitch Ratings affirmed in March 2024 the country's long-term foreign-currency issuer default rating of 'A-' with a stable outlook, following an upgrade in September 2023 from 'BBB+'.

"Portugal's ratings are supported by governance indicators higher than the 'A' median, with institutional strengths underpinned by EU and eurozone membership, and a record of fiscal discipline, which led to a process of deleveraging in the wake of the eurozone sovereign debt crisis," said Fitch Ratings.

Also in March 2024, Standard and Poor's upgraded its credit rating for Portugal to 'A-' from 'BBB+', with a positive outlook. Earlier in November 2023, Moody's also revised its credit rating upwards by two notches to A3 from Baa2, with a stable outlook, citing the country's solid medium-term economic growth outlook.

Inflationary pressures are easing. Overall inflation was 2.2% in April 2024, slightly down from 2.3% in the previous month and far lower than the 5.7% recorded in the same period last year, mainly due to a deceleration in costs of transportation, as well as communications. Inflation averaged below 1% annually from 2009 to 2021 before surging to a 30-year high of 10.1% in October 2022. Inflation averaged 8.1% for the full year of 2022 and 5.3% in 2023.

The labor market remains tight. In Q1 2024, the nationwide unemployment stood at 6.8%, up from 6.6% in the previous quarter but down from 7.2% in the same period last year, based on INE figures. Before the Covid-19 pandemic, the jobless rate had been steadily falling, from 17.1% in 2013 to 6.7% in 2019. After rising to 7.1% in 2020, the unemployment rate fell again to 6.6% in 2021 and further to 6.1% in 2022.

The jobless rate is expected to average 6.6% this year and 6.5% in 2025, according to the Banco de Portugal.

Sources:

• Bank appraisals on housing increased 16 euros to 1,596 Euros per square meter - April 2024 (Instituto Nacional de Estatistica): https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=645851897&DESTAQUESmodo=2

• Economic projections (Banco de Portugal): https://www.bportugal.pt/en/page/projecoes-economicas

• Economic forecast for Portugal (European Commission): https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/portugal/economic-forecast-portugal_en

• Portugal (International Monetary Fund): https://www.imf.org/en/Countries/PRT

• Fitch Affirms Portugal at 'A-'; Outlook Stable (Fitch Ratings): https://www.fitchratings.com/research/sovereigns/fitch-affirms-portugal-at-a-outlook-stable-22-03-2024

• Portugal Upgraded To 'A-' On Ongoing Steep External And Government Deleveraging; Outlook Positive (S&P Global): https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/3133506

• Gross rental yields in Portugal: Lisbon and 5 other cities (Global Property Guide): https://www.globalpropertyguide.com/europe/portugal/rental-yields

• Key ECB interest rates (European Central Bank): https://data.ecb.europa.eu/main-figures/ecb-interest-rates-and-exchange-rates/key-ecb-interest-rates

• Portugal Golden Visa 2024: New Rules and Complete Guide (Global Citizen Solutions): https://www.globalcitizensolutions.com/golden-visa-portugal/

• Portugal Home Ownership Rate (Trading Economics): https://tradingeconomics.com/portugal/home-ownership-rate

• New Tenant Rights in Portugal (Blanca Valbuena): https://blancavalbuena.com/tenant-rights-portugal/

• Hypostat 2023: A Review of Europe's Mortgage and Housing Markets (European Mortgage Federation): https://hypo.org/app/uploads/sites/3/2023/09/HYPOSTAT-2023-FOR-DISTRIBUTION.pdf

• What are the rights of tenants and landlords in Portugal? (Flatio): https://www.flatio.com/blog/what-are-the-tenant-and-renters-rights-in-portugal