Warning about a correction in real estate prices.

Financial rating agency Moody's

It is believed that the slowdown in the economy, rising interest rates, and high inflation will soon change the real estate market. In an analysis published by CNN Portugal, the rating agency notes that "since 2015, housing prices in Portugal have increased by an average of 9.1% per year, which is one of the fastest growth rates in the European Union and significantly higher than the average of 27 countries - 5.5%. Continuous economic growth, low interest rates, and investor demand have contributed to this development."

Now the situation has changed.

“The economy is slowing down, high inflation is driving interest rates, and likely, investor demand will start to decline, which increases the risk of price drops.” The agency's analysis even states that “housing prices have exceeded their intrinsic value, which has heightened the risk of a correction.”

This is due to the fact that annual yield indicators (to assess whether it is more profitable to rent or buy) and housing availability have exceeded level 1 in Portugal. This means that Portuguese families have to invest about 1.3 times their annual income to purchase a home. This can be considered a factor of overheating in the market and may lead to a correction in the coming months.

Correction in the real estate market

It may particularly affect families with mortgage loans.

The agency notes that "as part of these measures, credit providers must assess the ability to repay debts at interest rates exceeding the actual interest rates by three percentage points, etc." This measure may "help mitigate risks amid rising borrowing costs," but it could "take away access to credit from potential buyers," which will affect housing demand.

Nevertheless, Moody's points out

According to data from the Portuguese Bank of Portugal, between 2018 and the second quarter of 2022, "about 50% of housing was purchased with cash," rather than through bank loans. This indicates a lower dependence on loans compared to other European countries. Ten years ago, cash purchases accounted for about 25%.

The rise in interest rates has also made real estate less attractive to foreign investors, who accounted for 11.7% of transactions in June 2022. If the "golden visa" program really comes to an end, Portugal will become less appealing to foreigners, which has contributed to the doubling of housing prices in the Lisbon, Porto, and Algarve regions since 2011.