Is there a housing bubble in Portugal?

In recent months the national real estate market has been analysed by the European Commission and the Bank of Portugal, as a result they are warning of the overvaluation of property prices.

The Residential Price Index (RPI) reached a record recovery only similar to 1992, of 16.4% in May1. However, rising prices are not the only factor to confirm the existence of a real estate bubble. One indicator to be considered, as pointed out in the Bank of Portugal‘s Financial Stability Report, is the reopening of real estate credit by the banking institutions.

The availability of housing mortgages increased by 43% (between 2016 and 2017), meaning there is a concern that households might not be prepared for a potential rise in market interest rates. On the other hand, banking institutions state that the adjustment of prices is standard after so many years without investment, and reiterate that nowadays the approval of credit is more restrictive and cautious: “… a few years ago most of the transactions were granted with almost 100% credit. When the crisis broke out, people found themselves locked into large repayments with their properties worth much less. Today the situation is quite different," says Luís Ledo, Managing Director of Casas do Barlavento.

The market itself is now more cautious and different from 2009, with consumer optimism, decreased unemployment, low-interest rates, an increase in tourism and foreigners residing and investing in Portugal.

Foreign investment, which has already attracted 15,000 non-habitual residents2, has brought changes to the market by boosting real estate prices. However, they allowed a market stabilization with more than 80% of the transactions made without the need for credit: "The majority of the purchases that are being made now are using equity. I can say that in 2017, only two of the transactions we made were via bank credit, "says Luís Ledo.

The shortage of real estate supply in the face of rising demand is another factor driving house prices up. The European Commission believes that with the addition of new buildings and a consequent increase in the supply of real estate, there will be a balance in the market: "The recovery of construction should add supply".

The Bank of Portugal says it is closely monitoring the situation in order to safeguard financial stability, not explicitly speaking of a bubble in the national real estate. In contrast, the European Commission is confident that the rise in house prices will "gradually slowdown in the medium term", in addition Luís Ledo feels "a tendency for stabilization", allowing a balance of the market prices.

1 RPI reached a year-on-year increase of 16.4% in May, according to Confidencial Imobiliário (Sep 2018).

2 Eighth post-program evaluation by the European Commission (EC).