Is Portugal heading for a residential property bubble?

Portugal could be the first country in Europe to suffer a correction in its property market in 2023 according to a financial consultant. However, it is unlikely to see a bursting property bubble as some analysts are warning.

Speaking on CNN Portugal, and referring to reports that have appeared in the International press, Filipe Garcia admitted that some kind of “correction” could be on the cards.
In Portugal over 93% of mortgages have variable rates, compared to the European average of 15%, affecting 1.3 million families. With rising interest rates, mortgage defaults are expected to increase in 2023.
Real wages fell 4.6% in H1 2022, while wage increases in 2023 will be lower than inflation. Rising interest rates will also contribute to higher costs to service mortgage, car and personal loans, while higher energy costs will put pressure on savings. (which it has to be said are at a record level in Portugal among the general public)
Portugal finds itself in a very challenging environment as one of the countries in Europe with the lowest GDP per capita, and a soaring real estate market.
Due to its over dependence on the tourism sector, Portuguese families are feeling the pinch in terms of inflation and rising food costs adding around €24.17 to a €207.80 weekly shopping basket of essentials.
Yet despite property prices reaching new highs, fuelled by a buoyant overseas investment market in the residential sector (An average of +17.2% for luxury and +7.3% for non-luxury housing since January 2022), house inflation in the centre of cities are pricing middle classes and young families out of the market, while developers are reluctant to build new affordable housing because of the costs of raw materials, energy costs and high taxation (+10.1% in Q1, 2022).
Experts say that house prices in Portugal are high due to low supply, but the supply of homes is only represented by the properties listed for sale on the market, and that does not mean that at some point in the future there won’t be more properties in the future available for sale.
Portugal is one of the European countries with the highest number of houses per inhabitant, with 581.5 homes for every 1,000 inhabitants.
It is also estimated that between 730,000-750,000 properties are standing empty because tenants are having a hard time keeping up with rent payments, with 8.5% of all properties listed for rent having tenants who landlords say are behind on their rent by up to 3 months, while 7% have tenants that have not paid their rent for 6 months.
Landlords also have to pay around 28% in taxes on revenues, before any maintenance, which also explains why so many properties remain vacant.
Yet on the tenants side, rents are expected to be 5.43% higher in 2023, which will put additional pressure on tenants and landlords. Even with the recent measure announced by the government to limit rent increases by only 2% and offer landlords tax rebates, the increases will still be felt by around 26% of the population according to the abstract by Luís Mendes ‘The Dysfunctional Rental Market in Portugal’.
Filipe Garcia, consultant from Deloitte in Porto said on CNN: “I’m not so sure about these reports circulating internationally suggesting Portugal has a property bubble that is about to burst. I don’t think the current rate of late payments on mortgage or defaults are sufficient to derail the Portuguese housing market as a whole.
“The fall of 4.6% in real wages in Portugal is happening, not because salaries have fallen, but rather because real purchasing power has”, he said, adding that it was evident that families would cut back on expenditure so as to not lose their housing and because the rental market would be almost if not just as expensive.
Residential house prices enjoyed their greatest increase ever in 2022. In Q2 they went up 13% like-for-like on 2021. In May and June alone OVER 43,000 homes were sold, but the market could cool in terms of sales in the second half of 2022.