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Is there a real estate bubble in Lisbon? Yes, there is, and Porto is on the way.

Is there a real estate bubble in Lisbon? Yes, there is, and Porto is on the way.

The strong rises in real estate prices, has been a recurring theme in Portugal, having made multiple covers of newspapers and magazines, with several variations (from the most expensive rooms in the capital to the millionaire houses). There is talk of real estate bubble, of speculators, of the contagion effect of the tourism boom. There is no one who can be indifferent to the matter, from the taxi driver to the executive.

Why do prices rise?

At the risk of appearing to be a Lapalissade, simply because demand is greater than supply. Because Lisbon was very cheap, when compared with other great European cities with equivalent tourism potential. Because tourism has exploded in the last 6 years, and by the effect of Short Term Rentals. Because of the (so contested) amendment to the Rental Law that facilitated the urban rehabilitation of buildings that were in a calamitous state, having caused a price increase by upgrading the quality of the product. Because those who want to switch house are forced to ask for more money for their current house, since they will need to pay more for the house they want to buy. Because there are some opportunists who are taking advantage of the price hitch to ask for fortunes from ruined buildings for rehab and, this drives the prices to climb in a chain effect. Because small businesses of house flipping have risen, buying old to renovate and sell pulling prices up. Because the supply of apartments for rent is scarce, and an investor knows that if he buys an apartment he can rent it quickly (even at very stretched prices). Because the interest rates are very low, or even negative, and the real estate presents itself as a much more interesting asset. Because builders once depressed with the crisis have also started asking for more money for construction works. And because it rains or because it is sunny – that is, by the effect of mass psychology, or irrational exuberance as coined by Nobel laureate Robert Schiller.

It is curious that when talking about the hypothesis of a real estate bubble being formed, the media seek the professionals of the sector (real estate agencies, developers and promoters) to ask what they think of the topic. Well, it would be strange to hear from these agents something in favor of the formation of this bubble.

However, it is not our opinion.

Cycle inversion or consolidation signals

In our opinion, there are signs that should be taken into account for the risk of a possible reversal of cycle (or, at least, consolidation):

  • The Bank of Portugal and the IMF have already alerted for the risk of formation of real estate bubbles in some areas due to imbalances between supply and demand, and this news has been echoed internationally, with many investors expressing fear of investing in these prices . We ourselves are receiving more and more indications from investors who, although they have an interest in investing in Portugal, prefer to wait for some time because they are afraid that the market can be at a turning point;
  • According to the Portugal Real Estate Investment Survey Q2 2018, by Deloitte, 46% of the respondents indicated their intention to divest in the residential real estate;
  • The volume of issuance of Golden Visas has been falling: 1,041 visas issued until July 2017 and only 863 until July 2018, many of which pending cases from last year;
  • Finally, as it is said in the stock market, when even the shoemakers speak and say about stocks, it is time to sell. In Portugal, never so much attention was given to real estate. There are more real estate agencies than ever before, almost every family has someone connected to real estate, the covers of magazines are multiplied with news and reports on the subject, almost everyone knows someone who has already bought or wants to buy a small apartment for rent;
  • As we mentioned in our Market Snapshot of 2017, last year there was an increase of 26.8% in the city center, being the accumulated of 71% since 2012. These values ​​are not sustainable, and are unhealthy.

But, is there really a bubble in the housing market?

To confirm these signs, we made a comparative analysis of a sample of several European cities (chosen at our discretion) in order to evaluate the number of years required to pay a 120 sqm apartment in the city center, using the net salary received in the city. In Lisbon, it takes 45.9 years, with the city in top positions after Vienna, London, Milan, Moscow and Paris. On average, for this sample, it takes 30.8 years to pay for an apartment.

If we used 30.8 years as a reference, the price per sqm in the city centre of Lisbon should be € 2,675, and by the end of 2017 it was € 3,985 (€ 4,143 at the end of the Q1 2018), which is almost 50% above the equilibrium value calculated by this method.

As a word of caution, we should note that this is not just a problem in Lisbon. If Lisbon is on the same level as the big European cities, it is because the investors recognize the strong potential of the city. In the same way that when you look at the strong valuations of Apple, Google and Amazon shares, we may consider them expensive or valuable to be where they are. Dont’t forget: money goes after opportunities.

Investment in the center of Lisbon is being supported by foreign investment because prices are not affordable for the Portuguese middle class. This phenomenon also happens in large cities that attract a greater volume of investment (London, Paris, Milan, Vienna, New York, Hong Kong, etc …), but unfortunately Lisbon, with all its competitive advantages, can not yet be compared to these cities. Lisbon risk is higher, and when the economic cycle changes, with rising interest rates and lower risk appetite, these factors may weigh when investors have to make divestiture decisions.

Note that Porto is already above 30.8 years, with 32.4, that is, there are also clear signs of overheating.

What to expect next?

Are we pessimistic? Not at all. We prefer to consider ourselves realistic, and inform our customers and followers so as not to be surprised.

When we look at the numbers in absolute terms, Lisbon continues to be competitive with other European cities, yields remain better than most of the competitors, the offer has very high quality, the city is lovely from a lifestyle standpoint. Many of the features we have overtly defended, particularly in our latest Market Snapshot.

From the perspective of a foreign investor, who wants to buy an apartment to obtain income, prices in Lisbon are still appealing (see previous chart), when compared with other European cities, particularly given the strong capital appreciation.

It is impossible to predict the end of any cycle, be it in the stock market or in real estate. Despite the signs that indicate real estate bubble risks, this can last much longer. See what happens in the stock market.

Our recommendations

Our recommendations for the current market moment, in the perspective of a foreign investor are:

  • If you bought a house in Lisbon a few years ago, and you’re considering selling it, this may be the right moment. If you’re betting on the long term, keep it;
  • If you are considering switching house in Lisbon (selling and buying a new one), perhaps it would be better to sell and hold capital, meanwhile renting an apartment;
  • If you want to buy for investment, you should consider alternative locations, in the periphery of the city, because that is where the middle class is buying, reducing the risk of international buyers fluctuations;
  • The effect of the bubble does not occur in all classes and types of assets. For example, in the case of villas this effect is not so noticeable. There are also interesting and less explored opportunities such as student residences, and others;
  • Should you want to buy in the city centre, you must negotiate well to buy below the market value: opt for quality, such as new developments (rehabilitation / renovations), or resales at competitive prices (definitely below 4,500 € / m2 for resales).

We are at your disposal to discuss and assist you with these and other investment ideas. Contact us through our channels.


This article conveys Nomera Capital’s view on the state of the real estate market, and we assume no responsibility or liability for any errors or omissions in the content of the same. The information contained in this content is provided “as is” without warranty of integrity, accuracy, usefulness or timeliness … “.

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