House prices in Portugal are rising without a bubble, but are approaching the limit.

Housing prices in Portugal continue to rise, although the rate of increase has slowed down due to lower demand for real estate. In light of this continuous increase in housing costs, Brussels has even warned that the residential real estate market in Portugal is "grossly overvalued".

But is it in a real estate bubble? Rating agency DBRS says there is no housing price bubble in our country, but low unemployment and migration will continue to contribute to the real estate price "ceiling".

Home sales are declining in the European Union (EU) amid limited purchasing power and high mortgage interest rates. And this decline in demand is reflected in house prices in various countries such as Germany, where they fell by 10.2% in the third quarter of 2023 compared to the same period, Eurostat data indicates. As a result, house prices in the EU fell by 1% and in the eurozone by 2.1%. But there were also Member States where house prices continued to rise, such as Portugal (+7.6%).

In our country, "the link between real estate and credit markets may be less strong than in other countries" because a large proportion of Portuguese who own their homes (about 80% of the population) are no longer paying a mortgage.

This constant increase in the cost of housing in Portugal has even led the European Commission to warn that "housing prices in Portugal are clearly overvalued".

So is Portugal in a real estate bubble? DBRS says not. With a "chronic housing shortage", low unemployment and rising net migration, DBRS Morningstar analysts believe it is "less likely" that Portugal's house prices will plummet. Therefore, they believe that "prices are not in a 'bubble' but rather reaching a 'ceiling'," concludes their research published on Monday, February 5.

However, in the "medium term, [price] dynamics could change," which "depends on getting inflation under control, leading to a stabilization of interest rates and the current economic slowdown, especially in the eurozone, which should be relatively short-lived," the analysts add.

In addition, it is worth noting that the end of tax incentives for foreign nationals may also relieve the pressure created by the excess demand for international housing. "Recent changes in the tax regime for permanent non-residents, as well as the cessation of new 'golden visas', could lead to a reduction in external demand for Portuguese property", analyze the DBRS experts, noting, however, that Portugal will still have other attractive factors for foreigners, such as climate and low cost of living.