You'd better keep waiting, according to the "2023 European Semester: Country Reports" from the European Commission (EC). While the Portuguese real estate market continues to face challenges, this report suggests that a significant correction in house prices is not on the horizon. The combination of supply constraints, strong foreign investment, and policy measures aimed at increasing the resilience of families and the banking system all contribute to this outlook.
According to the EC, house prices in Portugal have been on a steady rise due to a scarcity of supply. Over the last decade, house prices have doubled in nominal terms, with the last three years (2020 to 2022) recording an increase of around 34%. In 2022 alone, house prices increased by approximately 13%.
The EC predicts that house prices will continue to grow, albeit at a slower pace. This is primarily due to rising interest rates, which are expected to moderate house price growth. However, certain supply constraints will continue to exist, reducing the possibility of a substantial reduction in house prices. This is particularly true in the context of strong property demand by foreign investors.
The EC also highlighted some measures taken in response to recent house price developments. The central bank of Portugal, Banco de Portugal, has adopted a macroprudential recommendation, reducing the average maturity for mortgage-backed loans to 30 years starting from 2023. This measure, along with existing macroprudential measures, is expected to increase the resilience of households and, in turn, the banking system.
Furthermore, the Portuguese government approved a draft program targeting the Portuguese housing market (Programa Mais Habitação) in February 2023. This program is currently under discussion and approval in the Portuguese Parliament.
The EC acknowledges that the real estate market and its implications for financial stability continue to be a concern. This is due to the fact that 90% of mortgages in Portugal are variable-rate, and a rise in the Euribor can significantly increase monthly loan payments, putting families under financial stress. However, the EC also notes that there are mitigating factors. For instance, the proportion of disposable income needed to cover the average monthly mortgage payment in Portugal is still manageable for most families and is below the level observed a decade ago.
For more information, check the full version of the report here.