Portugal real estate prices

On the Edge of 2023: What the Future Holds

Many agencies advertise Portugal as the land of milk and honey. To a certain extent, it is true. However, the country's economy is highly entwined with Europe and is integrated into the world economic system. For better or worse, globalization made all the economies interdependent through the existing ties. This means that you need to brace yourself because the large flow of foreign investment alongside COVID-19 consequences and the upcoming European energy crisis is going to impact the housing market inevitably.

The Perks to Lure You In

Portugal was once a great empire that dominated the seas, explored the world, and colonized countries. Some of its policies were questionable, to say the least, but it's all water under the bridge. Now, the situation is kind of reversed: an abundance of Chinese, Brazilian, and American home hunters flooded the market in their quest to track down the most beautiful places to live there or Airbnb them. Let's see what incentives the country managed to bring to the table to cause this commotion.

• The Old World vibe & climate. Portugal has a rich cultural background and fascinating nature. You can find historical pieces or a breathtaking view around every corner. Yet, you don't have to pay to live near it as much as you would have in other European countries.
• The lowest mortgage rate in Europe. The Portuguese National Institute of Statistics reported that the average mortgage rate even took a downward shift from 1.1% in 2019 to 0.892% in 2020.
• Attractive tax regime. The non-habitual residents (NHR), such as high-net-worth individuals or entrepreneurs, are entitled to enjoy the benefits of a lower tax burden and save a part of their foreign income. To be precise, if you qualify for the NHR program, you will be exempted from paying income tax for the first 10 years of residence.
• Golden visa program. This initiative is designed to provide non-EU residents with a viable mechanism to obtain a residency permit. The scheme is simple: you purchase a Portuguese property worth more than €500,000, and you are granted a 5-year residency permit. As a result, you are allowed to live or work in Portugal, but not obliged to do so. You have to stay in the country for a minimum of 7 days, the rest of the year you can spend enjoying the visa-free hospitality of other Schengen members. After 5 years, you can apply for a permanent residency or citizenship.

The Alarming Signs to Keep in Mind

As tempting as the established conditions may seem for foreign investors and pilgrims, Portugal isn't an exemplary, prosperous economy. Plus, it remains a part of the global economy, which continues to be under great pressure. Essentially, peculiar internal and external determinants are antecedents to the possible trouble in paradise.

• The disproportion between demand and supply

It is a well-known fact that price depends on the correlation between supply and demand. When the demand is high and the supply is low, the price goes up. That is the renowned scarcity principle. Today's situation with the housing shortage and booming property prices in Portugal is the perfect illustration of this concept.

In their attempts to liberalize the housing market, Portuguese authorities relied heavily on the private sector to regulate real estate affairs. As a result, an enormous number of people were forced to move from the city center to the suburbs because only foreigners had the money to afford this accommodation.

Unfortunately, it was not only the prices in rich neighborhoods that increased, the trend also affected the common people like nurses or social workers who faced the necessity to live in overcrowded conditions or skip their rent payments. Inadequately high delinquency rates and the need to pay ~28% tax on landlord's property income lead to the current situation when approximately 730,000 to 750,000 properties stay empty and deteriorate without being listed for sale.

• COVID-19 implications & variable mortgage rates

Relying too much on the tourism industry and foreign investment in the real estate sector, the Portuguese economy has been substantially maimed by the COVID-19 consequences. Although it has been reported that tourism in the country is gradually mending its broken bones, the expected inflation rate in 2023 is still forecasted to be higher than the increase in wages.

Low-interest rates and large amounts of credit available resulted in an environment where reckless spending is favored over safe investments. Therefore, savers and investors choose to put their money in risky businesses in desperate attempts to generate returns, while another part of the population continues to accumulate debt (e.g., the number of funds granted as mortgages and housing loans displayed a ~670% growth over the past 9 years).

Furthermore, Portugal shows the lowest rate of financial literacy among European countries. Combined with the statistics revealing that 93% of local mortgages are with variable rates, the grave perspective of the future real estate market collapse seems quite feasible due to the majority of families being unable to pay their increased interest rates.

• Energy Crisis

Indeed, Portugal is one of the lucky European countries that are the least dependent on Russian energy imports. Still, eventually, the devastating situation with the skyrocketing prices of energy resources in Europe will affect Portugal as well. Local energy companies will want to increase the prices to keep up with the market, forcing many people to choose ‘between heating and eating'. In addition, as the Europeans face the challenges of spending their savings on electricity and heat, they might think twice before going on any trips abroad, causing another wave of harm to the Portuguese already fragile tourism sector.

The Aftermath: Shuffling Trends & Scenarios

As you can see, there are some holes in the festive tapestry of the Portuguese property market. Depending on how successful the joined forces of the local and European authorities are in combating the imbalance between supply and demand, renouncing the reliance on foreign investment, bringing order to the chaotic state of the rental sector, and dealing with the growing debt, there are positive and negative scenarios of the future.

Overall, you might want to take the positive approach with a grain of salt. The European institutes' actions to mitigate the economic crisis in 2008-2009 largely contributed to the current deteriorated state of affairs in the first place, and the Portuguese government has been on the crusade to invigorate the real estate sector for decades, but its efforts turn out to be futile. However, both Portugal's central bank and Idealista, one of the country's biggest real estate sites, are fairly optimistic about the prospects and suggest that although economic depression remains a possibility in a mid- or long-term perspective, in the near future the country will experience slow growth, but not a recession.

So, here are your options if you are considering investing in or relocating to Portugal.

1. Buy

With this premise, your perspectives are as unpredictable as the ever-changing winds of this region. Naturally, it is better to buy now because the prices won't be falling until the containing measures prove their effectiveness, and now you can still enjoy plenty of privileges designed to entice foreign capital. For instance, non-residential pensioners have already lost their tax breaks and will be obliged to pay up to 10% tax on their income.

Make It Your Own

Keep in mind

For any financial deals that are carried through banks and have fiscal implications, you will need your passport and Portuguese tax number (NIF).

Mortgage Basics

Word of advice

You might want to refrain from opting for a variable mortgage rate because it depends on the Euribor (Euro Interbank Offered Rate), which is expected to reach 2% by the end of the year. This entails the possible rise in the mortgage payments by 10% (6-month Euribor) to 17% (12-month Euribor).

Do It Your Way

You can spend €50,000-€200,000 to buy land and build your own home (of course, it will cost extra if you have to lay down basic infrastructure first). But do not forget to get your building permit first.

1. Rent

While locals struggle to find affordable accommodation for rent, a foreigner in this market can find many suitable options. Yet, you need to be prepared that some of the listings will be in abandoned or deteriorated buildings due to the increasing gap between wealthy and poor economic classes.

If you strive to obtain a property and then rent it out, the current circumstances might not be the most favorable for this endeavor. Locals are struggling with paying rent and tourists are still hesitant to rush into traveling. Plus, due to the local legislation, you will also have to deal with requesting a permit, passing the safety requirements, and paying a tourist tax.

1. Sell

Prices have risen unprecedentedly. As the country's statistics institute reports, the price of a property in Portugal displayed a 13.2% increase compared to the previous year. Now is a great time to sell your real estate. Do not forget that you will need a surveyor or the local housing market to determine your home's value before listing it as available for sale.

How to Navigate Property Prices in Portugal

‘East or west home is best', that's what people say. But nothing stops you from deciding whether your home should be in the western or eastern part of the country (and even southern or northern, for that matter). Let's explore your options when it comes to Portugal's real estate market.

The Most Expensive Places

Naturally, big cities and cozy coastal towns with nice weather will drain your wallet the most. For instance, the property prices in Lisbon and Porto are 336% and 191% higher (respectively) than the average price across the country. In Algarve, foreigners account for almost half of the real estate sector transactions. This is why Lisbon, Porto, and coastal towns of the mainland were excluded from the golden visa club (but you can still invest in commercial property there and get your residency).

Overall, if you are looking for that kind of place, these are the cities you might want to explore:

Retrieved from The Portugal News

The Most Affordable Households

The average price for purchasing a house in Portugal is 2,393 euros per square meter (euros/m2). Yet, do not be crestfallen, there are still many low-cost options to consider, including:

Retrieved from The Portugal News

Learn to Compromise

Luckily, Lisbon has many astonishing places nearby. For instance, only a 30-minute trip from the capital can take you to the sweet town of Cascais, a part of the Portuguese Riviera. Its main advantage is that unlike its ‘big brother' it provides a wide variety of available listings. Depending on the size of your wallet, you can choose a luxuriously furnished home (~2 000 000 euros), a small, but modern apartment (~300 000), or a distorted villa that needs restoration (~150 000).

The Most Profitable Investments

If you want your purchase to have value, you can pick one of the two options:

• Invest a large sum of money in the property in prestigious neighborhoods and regions.
• Save some cash and acquire something of reduced market value to renovate it.

Bonus

The Portuguese government strives to instigate the spreading of the second option. Hence, it dropped the minimum amount of real estate investment to be eligible for a golden visa to €350,000 if you intend to repair the property that is more than 30 years old (€280,000 if it is located in a low-density area). Moreover, if you make your home more sustainable in terms of energy efficiency, your expenditures can be compensated by the authorities.

Final Thoughts

Considering the perks and pitfalls of Portugal's real estate, your investment or relocation plans should be cautiously optimistic. Indeed, the current perspectives of the Portuguese economy, in general, look rather bleak. However, the country's housing market has a lot to offer. Real estate prices in Portugal are unprecedentedly high. Yet, there are still many suitable options on the table, and within the walls of a safe home, you can feel prepared for any social or economic mayhem to come.