House prices in Portugal have been overvalued for six years

House prices in Portugal have shot up by 83% in real terms between the start of 2013 and the end of 2023 – an amount above Spain’s 23% for the same period according to a study published in the Bank of Portugal’s Economic Studies Review.

The study concludes that house prices have been artificially overvalued in the Portuguese residential real estate market for seven years, since the start of 2017.

“In Portugal, prices showed signs of overvaluation at the end of 2023, while in the Spanish market this behaviour was not seen,” say economists Rita Fradique Lourenço, Afonso Moura and Paulo Rodrigues in the article “Housing market in Portugal and Spain: Fundamentals, overvaluation and shocks”, which is part of the October banking supervisor’s review.

The authors recall that, in recent years, Portugal and Spain have faced similar financial crises and adjustment processes and that housing prices in both countries have contracted, albeit by a different magnitude. Thus, between the financial crisis of 2008 and 2013, prices fell, on average (in real terms), by 4% per year in Portugal and more than 8% in Spain.

From 2014 to 2023, house prices bounced back to average annual growth of 6% in Portugal and less than 3% in Spain.

“Housing price growth in Portugal for most of the period considered has been driven by demand forces, with supply being unable to offset this effect. In the Spanish case, this demand pressure is mitigated by the contribution of supply, particularly in the pre-pandemic period,” the report reads.

From the beginning of 2020 to the end of 2023 (In the Portuguese case, for example), there was a slowdown in residential investment during the pandemic, followed by a “strong recovery (again, mainly driven by demand) in 2021”.

Subsequently, since mid-2022, the beginning of the restrictive monetary policy cycle initiated by the European Central Bank (ECB) has led to a slowdown in both investment and prices, “although at the end of 2023 house prices started to rise – once again driven by demand.”

In Spain, on the other hand, “prices have grown below or within the historical average” since the pandemic period. “Initially, a lack of supply put slight pressure on prices resulting in price increases, but overall weak demand counterbalanced this trend”. In the most recent period, “neither demand nor supply has been creating considerable price pressures,” they say.