Real estate in Portugal: is the bubble growing?

Недвижимость в Португалии: нарастает пузырь?

The rising cost of mortgages could slow home buying.

With house prices steadily rising in Portugal, the country is facing a real estate bust, according to an idealista report. Buying a home is getting more expensive, with prices rising since mid-2013, as data from the National Statistics Institute (INE) shows. This reflects the dynamism of the Portuguese real estate market, as well as the shortage of residential homes compared to demand.

For five years, the value of housing in the Portuguese market has shown annual changes above the value at which the European Commission (EC) considers the market to be at risk of a price bubble, as indicated by Eurostat in August 2021. And it is not the only organization that has come to this conclusion, "After the third quarter of 2017, the Portuguese housing market may show signs of excessive price increases", concludes a CaixaBank study published in January 2022. This means Portugal is at risk of a price bubble.

Price bubble in Portugal.

The solution seems to be to raise interest rates on mortgages, which are currently at historic lows and are attracting many families to buy homes. A possible increase in key European Central Bank (ECB) interest rates has been discussed in recent months. But Christine Lagarde, president of the ECB, said last November that "it is highly likely that the conditions for raising interest rates will not be met in 2022." The real reason is that a possible increase in interest rates depends on inflation, which is currently rising in the eurozone, and on how long high prices will persist in the market.

The imbalance between supply and demand.

Because of the growing disequilibrium between housing supply and demand, there are "signs of a potential overvaluation of house prices" in Portugal, the EC has warned, and the potential for overvaluation still exists.

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This perfect storm was caused by a combination of several factors that drove demand in the Portuguese housing market. Home prices have risen due to the pandemic, and families have been able to save up the necessary funds to buy a home or get a mortgage. And second, the terms of home purchase financing are more attractive now - especially given the low interest rates. However, housing supply is not keeping up with the explosive growth in demand. CaixaBank analysis shows that since 2006, fewer than 20 new homes for every 1,000 homes have been built in Portugal. Thus, the data shows that "there was no oversupply of new housing putting pressure on house prices," the study concludes.

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