Portugal

Portugal’s house prices continue to rise, despite falling demand

Lalaine C. Delmendo

Portugal’s house prices are still rising, despite falling demand and slowing economic growth. During the year to October 2023, the median price of dwellings in Portugal rose by 8.17% to €1,536 (US$1,655) 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 10% annually from 2017 to 2022.

However, when adjusted for inflation, nationwide dwelling prices have increased by a more modest 5.93% y-o-y in October 2023.

Portugal’s house price annual change

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 the Lisbon metropolitan area, property prices were up by 7% (4.8% in real terms) in October 2023 from a year earlier, to a median price of €2,033 (US$2,190) per sq. m.

By region:

  • In the North, the median property price rose by 8.3% y-o-y in October 2023 (6.1% in real terms), to €1,300 (US$1,401) per sq. m.
  • In the Center, property prices were up by 6.8% y-o-y in October 2023 (4.6% in real terms), to €1,071 (US$1,154) per sq. m.
  • In Alentejo, property prices rose strongly by 11.2% (8.9% in real terms) y-o-y to €1,091 (US$1,175) per sq. m.
  • In Algarve, property prices rose by 6.1% (3.9% in real terms) y-o-y to €2,109 (US$2,272) per sq. m.
  • In the Azores Islands, property prices increased 11.2% (8.9% in real terms) y-o-y to €1,208 (US$1,301) per sq. m.
  • In Madeira, the median property price rose by a huge 19.6% (17.2% in real terms) y-o-y to €1,712 (US$1,844) per sq. m. in November 2022.

By property type, apartment prices rose by 7.6% y-o-y to €1,701 (US$1,833) per sq. m. while house prices increased by 5.1% to €1,200 (US$1,293) per sq. m.

The continued rise in house prices is surprising given the sharp decline in property demand. In the first half of 2023, the total number of housing transactions in Portugal fell sharply by 21.8% to 68,117 units from a year earlier, while transaction value dropped 15.9% y-o-y €13.76 billion (US$14.83 billion) in H1 2023. All regions saw falling housing transactions over the same period.

The residential construction sector remains robust. In the first ten months of 2023, the number of licensed dwellings rose by 5.6% y-o-y to 27,130 units, based on INE figures. Likewise, dwelling completions were up by 8.2% y-o-y to 10,579 units in the first half of 2023.

The 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 a modest 2.2%, based on figures released by the European Commission.

Demand is now falling rapidly

In the first half of 2023, the total number of housing transactions in Portugal fell sharply by 21.8% to 68,117 units from a year earlier, following y-o-y increases of 1.3% in 2022 and 20.5% in 2021, according to INE figures. Likewise, transaction value dropped 15.9% y-o-y €13.76 billion (US$14.83 billion) in H1 2023, in contrast to annual growth of 13.1% in 2022 and 31.1% in 2021.

In H1 2023:

  • Existing dwellings: the number of transactions declined by a huge 24.2% y-o-y to 54,322 units while transaction value fell by 19.5% to €9.97 billion (US$10.74 billion).
  • New dwellings: the number of transactions fell by 10.8% y-o-y to 13,795 units while transaction value decreased by 4.9% y-o-y to €3.79 billion (US$4.08 billion).

By region, AM Lisbon and Algarve had the biggest decline in the number of housing transactions, both registering a y-o-y fall of 27.4% in the first half of 2023, followed by Alentejo (-20.5%), Norte (-19.7%), and Centro (-14.6%).

In the autonomous regions of Madeira and the Azores Islands, housing transactions dropped by 20.3% and 20.5%, 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.

Portugal Number of Housing Transactions graph

Construction activity continues to grow, albeit at a much slower pace

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.

Dwelling completions have followed a similar pattern, rising continuously from 2016 to 2021, registering an average growth of 19.2% annually. During 2022, completions continued to increase, albeit at a much slower pace of 3% y-o-y to 20,156 units.

Portugal Residential Construction graph

The residential construction sector continued to grow modestly this year.

  • Licensed dwellings: 27,130 units in the first ten months of 2023, up by 5.6% from a year earlier
  • Dwelling completions: 10,579 units in the first half of 2023, up by 8.2% from a year ago

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 figures from 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).

Portugal Housing Stock graph

House prices are already more than 70% above pre-recession levels

As of October 2023, Portugal’s nationwide house prices were about 70% 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 three years.

By region, AM Lisbon’s house prices are now about 83% above their previous peak. Also, house prices in the Algarve are now more than 79% up while they are nearly 73% up in the North. House prices in the Centre are up by more than 46%. In Alentejo, prices are now above their previous peak by almost 34%.

Likewise, house prices in the autonomous regions of the Azores Islands and Madeira are up by about 40% and 50%, 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 6.1% annually in 2021-22.

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).

Portugal Average Price of Dwellings graph

Portuguese property is relatively inexpensive

From the perspective of the foreign buyer, Portuguese property is astonishingly good value, despite the recent house price increases. Algarve, which is known for its Mediterranean beaches and golf resorts, had the most expensive housing in Portugal, with a median house price of €2,109 (US$2,272) per sq. m in October 2023, according to figures from INE. It is followed by Lisbon Metropolitan Area and Madeira, with median house prices of €2,033 (US$2,190) per sq. m. and €1,712 (US$1,844) 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.

Portugal Average Price of Dwellings by Property Type graph

Interest rates are rising rapidly

After staying more or less steady in the past six years, interest rates on housing loans are now noticeably rising. In October 2023, the average interest rate on new housing loans drawn stood at 4.23%, sharply up from 2.86% in the previous year and 0.81% two years ago.

By initial rate fixation (IRF), as of October 2023:

  • Floating rate & IRF of 1 year: 4.82%, sharply up from 2.53% a year earlier and 0.6% two years ago
  • IRF of 1-5 years: 3.86%, up from 3.22% in October 2022 and 0.74% in October 2021
  • IRF of 5-10 years: 4.98%, down from 5.41% a year earlier but sharply up from 2.63% two years ago
  • IRF of over 10 years: 4.21%, slightly up from 4.14% in the same period last year but sharply down from 1.88% two years earlier

Likewise, the average interest rate on outstanding housing loans was 4.64% in October 2023, sharply up from 1.57% in the previous year and 0.84% two years earlier. Over the same period:

  • Up to 1 year: 6.18%, far higher than the 1.90% in October 2022 and 2.17% in October 2021
  • Over 1 and up to 5 years: 7.53%, up from 5.09% in the previous year and 4.61% two years ago
  • Over 5 years: 4.63%, sharply up from 1.56% a year earlier and 0.84% two years ago

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.

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).

Portugal ECB Repo Rate and Housing Loan Interest Rates graph

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 past 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 42.5% of GDP and is expected to fall below 40% this year.

In October 2023, housing loans outstanding in Portugal fell slightly by 0.9% y-o-y to €100.53 billion (US$108.3 billion), according to the ECB.

Portugal Housing Loans Outstanding graph

Rental yields are moderately good

Apartments in Portugal continue to obtain moderately good rental yields, ranging from 3.97% to 7.35%, with a nationwide average of 5.64% in Q3 2023, according to recent research conducted by the Global Property Guide. 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 4.52% to 7.35%, with a city average of 5.67% in Q3 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 3.97% and 6.64%, with a city average of 5.49%. 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 return rental yields of around 5.08% in Q3 2023. Aveiro has a higher average return of 6.05%; Braga’s average yield is 5.37%; and Setubal generates rental yields of 6.17%, on average.

In Lisbon, a studio-type apartment rents for about €1,375 per month in Q3 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 €1,970. 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.

Portugal Monthly Average Exchange Rates graph

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 2004-2022. It reached an all-time high of 78.3% in 2021. The owner-occupation in Portugal fell slightly to 77.8% in 2022, 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 202o, 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 to slow, but government finances continue to improve

The 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 a modest 2.2%, based on figures released by the European Commission. On the other hand, Banco de Portugal and the International Monetary Fund (IMF) expect the Portuguese economy to expand by 2.1% and 2.3%, respectively.

“Going forward, the weak external demand as well as increased interest expenses of households and companies are expected to keep economic growth subdued in the near term. However, the rise in households’ income along with the projected gradual recovery in global trade volumes and the progress in the implementation of the Recovery and Resilience Plan (RRP) is set to gradually improve the economic performance over the forecast horizon. On an annual basis, GDP growth is forecast at 2.2% in 2023, 1.3% in 2024 and 1.8% in 2025,” 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.

Portugal GDP Growth and Inflation graph

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. The European Commission expects the country to record a budget surplus equivalent to about 0.8% of GDP this year and to 0.1% of GDP in 2024.

“Portugal’s general government balance is projected to reach a surplus of 0.8% of GDP in 2023, from the deficit of 0.3% of GDP in 2022,” said the European Commission. “The dynamism in government revenue is expected to continue in 2023, supported by a robust labor market, wage increases, and still high inflation. In turn, government expenditure growth is set to be contained, on the back of the complete phase-out of COVID-19 temporary emergency measures and the reduced net budgetary impact of energy support measures, forecast at 1.3% of GDP in 2023, compared with 2.0% in 2022.”

Portugal’s public debt also improved, falling to about 112.4% of GDP in 2022, from 124.5% in 2021 and 134.9% in 2020. It is expected to fall further to 103.4% of GDP this year and to 100.3% of GDP next year.

As a result of improving public finances, Fitch Ratings upgraded in September 2023 the country’s long-term foreign-currency issuer default rating to ‘A-’ from ‘BBB+’ with a stable outlook.

“Fitch forecasts general government debt/GDP to remain on a sharp downward trend,” said Fitch Ratings. “We believe there is a high degree of commitment to fiscal consolidation from the current Portuguese government, whose term is due to expire in 2026.”

Also in September 2023, Standard and Poor’s maintained its credit rating for Portugal at ‘BBB+’ but upgraded its outlook from stable to positive. Then 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.

Overall inflation eased to 1.6% in November 2023, down from 2.1% in the previous month and 9.9% in the same period last year. It was the lowest reading in two years, thanks to a decline in energy costs. Inflation averaged below 1% annually from 2009 to 2021 before surging to a 30-year high of 10.1% in October 2022.

The labor market remains tight. In Q3 2022, nationwide unemployment stood at 6.1%, unchanged from the previous quarter but slightly up from 6% a year earlier, 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 increase slightly to 6.5% this year and 6.7% in 2024, according to the Banco de Portugal.

Portugal Unemployment Percentage graph

Sources:

Portugal - More data and information