Portuguese Housing Market Overvalued Since 2017
A study published in the Banco de Portugal Economic Studies Magazine reveals that Portugal's housing market has shown persistent signs of overvaluation since 2017. Over the decade between 2013 and 2023, house prices in Portugal increased by 83% in real terms, far outpacing the 28% growth recorded in Spain during the same period. This sharp contrast highlights differing dynamics in the housing markets of the two neighboring countries.
According to economists Rita Fradique Lourenço, Afonso Moura, and Paulo Rodrigues, the Portuguese housing market displayed significant overvaluation by the end of 2023, a trend absent in the Spanish market. While both nations faced financial crises and price contractions from 2008 to 2013, their recovery trajectories diverged. Between 2014 and 2023, Portuguese house prices grew by an annual average of 6%, double Spain’s 3%, reflecting a more pronounced demand-driven surge in Portugal.
The researchers attribute this growth in Portugal to strong demand outpacing limited supply. In contrast, Spain's market saw supply increases tempering demand pressures, especially before the pandemic. In Portugal, residential investment slowed during the pandemic but rebounded strongly in 2021, driven again by demand. Monetary policy tightening by the European Central Bank in 2022 temporarily slowed investment and price growth. By late 2023, however, prices resumed an upward trajectory as demand pressures returned. Meanwhile, Spain’s market remained relatively balanced, with minimal demand or supply-driven price volatility since the pandemic.
Rising demand and limited supply drive housing prices beyond sustainable levels.
In 2023, housing costs represented a significant burden for Portuguese households, accounting for nearly 40% of average household spending. The median price of family homes nationally was €1,611 per square meter, with even higher figures in areas like Greater Lisbon (€2,740/m²), the Algarve (€2,613/m²), and the Metropolitan Area of Porto (€1,800/m²). By the second quarter of 2023, the median price reached €1,736/m², marking a 6.6% increase compared to the same period the previous year. The International Monetary Fund (IMF) has warned that housing affordability in Portugal has deteriorated sharply, with mortgage payments rising from 23.8% to 32.8% of average household income in just four years. By 2023, a household with median income could no longer qualify for a mortgage to buy a median-priced home.
Experts stress the urgent need to address housing supply shortages in Portugal, calling for reforms to reduce regulatory and administrative barriers and to tackle labor shortages in the construction sector. Programs like Construir Portugal aim to address these issues by simplifying construction processes, and if successfully implemented, such measures could alleviate some of the structural challenges contributing to the ongoing housing crisis.
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