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

The sharp rises in real estate prices have been a recurring theme, having made multiple covers of newspapers and magazines, with different variations (from the most expensive rooms in the capital to millionaire villas). There is talk of a 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 go up?

But why do house prices go up? At the risk of looking like a lapalissada, simply because demand is greater than supply. Because Lisbon was very cheap, when compared to other big European cities with equivalent tourist potential. Because tourism has exploded in the last 6 years, and the effect of Local Accommodation. Because of the (so contested) amendment to the Rent Law that facilitated the urban rehabilitation of buildings that were in a disastrous state, causing a price increase through the upgrade of the quality of the product. Because those who want to change houses are forced to ask for more money for their current house, given that they are asking more for the house they want to buy. Because there are some opportunists who are taking advantage of the price ride to ask for fortunes for dilapidated buildings for rehabilitation and this causes prices to escalate in a chain. Because small house flipping businesses have emerged that buy to recover and sell and push the price up. Because the offer of apartments for rent is scarce, and an investor knows that if he buys an apartment he will quickly rent it out (even at very “stretched” prices). Because interest rates are very low, or even negative, and real estate presents itself as a much more interesting asset. Because the depressed builders with the crisis also started asking for more money for the construction work. And because it rains or because it is sunny – that is, by the effect of crowd psychology, or irrational exuberance as coined by Nobel laureate Robert Schiller.

It is curious, in the midst of all this, that when talking about the possibility of a real estate bubble forming, the media looks to professionals in the sector (real estate agents and developers) to ask what they think of the subject. Well, it would be strange to hear from these agents something in favor of the formation of said bubble.

However, this is not our opinion.

Cycle reversal or consolidation signals

In our opinion, however, there are signs that deserve attention for the risk of a possible reversal of the cycle (or consolidation):

  • Banco de Portugal and IMF there has already been a risk of real estate bubbles forming in some areas, due to imbalances between supply and demand, and this news has been echoed internationally, with many investors expressing fear of investing at these prices. We ourselves are receiving more and more indications from investors who, although they are interested in investing in Portugal, prefer to wait some time because they are afraid that the market is at a turning point;
  • According to Portugal Real Estate Investment Survey 2.ºQ 2018, by the consultancy Deloitte, 46% of respondents indicated an intention to divest in 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 are pending processes from last year;
  • Finally, as they say on the stock market, when even cobblers talk and give their opinion about stocks, it’s time to sell. In Portugal, never before has so much attention been paid to real estate. There are more real estate agencies than ever, almost all families have someone connected to real estate, magazine covers with news and reports on the topic multiply, almost everyone knows someone who has already bought or wants to buy a small apartment for rent. ;
  • As we mentioned in our 2017 Market Snapshot, last year there was a 26.8% appreciation in the city center, with an accumulated increase of 71% since 2012. These values are not sustainable, and they are unhealthy.

But is a bubble really forming?

To confirm these signs, we carried out a comparative analysis between a sample of several European cities (chosen according to our criteria) in order to assess the number of years needed to pay for a 120 m2 apartment in the city center, using the average salary as a basis. liquid received in the city. In Lisbon, it takes 45.9 years, with the city in the top positions, after Vienna, London, Milan, Moscow and Paris. On average, for this sample, it takes 30.8 years to pay for an apartment.

Number of years needed to pay for an apartment in the city center

If we used this value as a reference, the price per m2 for Lisbon city center should be €2,675, and at the end of 2017 it was €3,985 (at the end of the 1st quarter it was €4,113), that is, the price is almost 50% above the break-even value calculated by this method.

As a word of caution, we should note that this is not just a Lisbon problem. If Lisbon is on the same level as the big European cities, it is because investors recognize the strong potential of the city. In the same way, when we look at the strong valuations of Apple, Google and Amazon stocks, we might consider them expensive or valuable to be where they are. Don’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 the big cities that attract the greatest volume of investment (London, Paris, Milan, Vienna, New York, Hong Kong, etc…), but unfortunately, Lisbon, with all its competitive advantages, still cannot be compared to these cities. Lisbon’s risk is higher, and when the economic cycle changes, with interest rates rising and risk appetite reduced, these factors will weigh in when investors have to make divestment decisions.

Note that Porto is also 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 that they are not surprised.

When we look at the numbers in absolute terms, Lisbon continues to be competitive with other European cities, the yields are still interesting, the offer has a very appreciable quality, the city is charming from a lifestyle point of view. Anyway, many of the features that we have heavily defended, particularly in our last Market Snapshot.

From the point of view of a foreign investor, who wants to buy an apartment to earn income, prices in Lisbon are still attractive (see previous chart), when compared to 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 risks of a housing bubble, this one can last much longer. See what happens on the stock market.

Our recommendations

Our recommendations for the current market moment are:

  • Anyone considering selling a home should seriously consider taking advantage of the current opportunity;
  • If it is your usual residence and you are thinking of buying a new property, it may be preferable to sell, keep the capital and lease (outside the city centre), ie sell and hold;
  • If you want to buy for investment, you should consider alternative locations, on the outskirts of the city, because that is where the middle class is heading, as better price/quality ratios are achieved, and you will be more protected from a possible shock (obviously you will have to choose good locations);
  • The bubble effect is not seen in all asset classes and types. We have already had the opportunity to show that, for example, in the case of housing, this effect is not so noticeable. There are interesting and less explored opportunities such as student residences;
  • Those who want to buy in the center should negotiate well to buy below market value: we advise looking for quality – new developments, or resales at competitive prices (definitely below €4,500/sqm).

We are available to help you with your decisions. Contact us through our channels.


This article conveys Nomera Capital’s view of the state of the real estate market, and we assume no responsibility or liability for any errors or omissions in the content thereof. The information contained in this content is provided “as is”, with no guarantee of completeness, accuracy, usefulness or timeliness…”.

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