The data is undeniable, Portugal's property bubble is the largest in Europe. The speculation is mainly present in the two largest cities. Lisbon, the capital has been the main stage for speculators.

How did Portugal's property bubble start?

Since 2015, Portugal’s housing prices have deviated from the EU average. Portugal’s property prices increased by 5.9% in 2020, at a slower pace than in 2019. Although the growth is slowing down, even throughout 2021 prices continue to soar.Source: Eurostat

According to Deloitte, while comparing housing prices on average in the country with the average price in Lisbon the deviation in price is 336%. In essence, it means that a regular citizen would have to pay over 336% higher prices for a house in the capital compared with the average house prices in the country. Out of over twenty countries, Portugal shows the highest deviation in reported prices. On average Lisbon and Porto, the second-largest city, are 164% more expensive than the national average.

Source: Deloitte

If we compare with other countries, Portugal was the only country to have a deviation that exceeded 100%. In second place comes Germany with an average deviation of 77%. The results are mind-boggling, Portugal’s deviation is over twice the amount of Germany. The southern region of Portugal is also experiencing an increase in prices. According to Idealista, the average home for sale in Algarve, the Faro district is €485,065, while the average home in Lisbon costs €591,072. F

Why are property prices in Portugal so high?

Mortgages in Portugal

One of the main reasons behind this wild speculative bubble is the fact that mortgage rates in Portugal are low. On average Portugal has the lowest mortgage rate in Europe. At an average of 1.1% in 2019, that has declined to 0.892% at the end of 2020, according to the Portuguese National Institute of Statistics. The low mortgage rates have made headlines, warning of a possible bubble forming in the European housing market.Source: Deloitte

Despite the low mortgage rate, many people are still unable to afford a house, especially in the major cities.

The inflow of foreigners helped create Portugal property bubble

Another reason that explains the high prices is that the number of foreigners living in Portugal is today a historical high. Nearly 500,000 foreigners have moved partially or permanently to Portugal. Not only are they in search of good weather, but also looking for lower taxes. 

Portugal has implemented some policies in order to attract foreigners. The non-habitual resident status allows foreigners to have a low tax rate on their foreign income. This is a very attractive way of reducing taxes and has contributed significantly to the increase of foreigners in the country. There is also the gold visa policy that is present in Portugal and some European countries. For example, Chinese citizens have rushed to obtain a golden visa in Portugal. Portugal grants a five-year residency permit to non-EU citizens, who purchase a minimum of 500,000 worth of property. This in turn allows them to travel across the Schengen countries, and after the initial five years, they can apply for permanent residency. Both policies have helped increase Portugal's property bubble.

The inflow of foreigners has also been contributing to housing speculation. The truth is that more than 50% of the demand for residential housing in the country comes from foreigners. The inflow of foreign capital in the region has impacted prices. With 60% of Portuguese earning under 800 monthly, for the average person, it has become increasingly difficult to afford a house.

Housing supply in Portugal

Another aspect to be considered is the supply and demand within the housing market. You would expect that Portugal does not have a lot of houses, and so that is the reason why prices are soaring. In fact, it is the complete opposite. Out of the 19 European countries analyzed, Portugal is the country where there are more dwellings per 1,000 inhabitants.

  Source: Deloitte

It is easy to understand that if demand for properties in Portugal slows down, there will be an oversupply of properties. If real estate investors want to eventually sell, the market can be easily flooded with properties. This in turn will put pressure on the prices, which should collapse quickly. 

If several investors make a run for liquidity, supply will easily outweigh the demand. If it happens, a new lower price will have to be established so that supply and demand are in balance. The European housing market has been soaring over the recent past. So much so that some experts are advising caution and are concerned that the effects of the pandemic might take some time to materialize.

Portugal’s economic situation

An economy built on a debt 

Portugal is already in a very fragile position given its 133.6% debt to GDP. It is one of the most indebted European countries, only surpassed by Italy and Greece. Household debt to GDP is also approaching very high levels. In March of 2020, it was at 63.8%, and it has increased to 68.3%. To put things into historical perspective, the highest household debt to GDP in Portugal was in 2009, at 92.2%.

Consumer credit is also approaching alarming levels not seen since 2009. At the end of 2020, the total consumer credit in Portugal amounted to 25.8 billion. 

Source: Global Economy

Mortgage credit in Portugal is also climbing higher. At the end of 2020, it reached 94.95 billion. Considering the GDP of the country in 2020 was around 200 billion that is nearly 50% of the GDP. Private sector debt, as well as business credit, have all continuously increased. This alarming scenario has pushed the Bank of Portugal to issue a warning, in its recent stability report. The Bank of Portugal seems concerned with the current state of the Portugal property bubble.

Portugal is over-dependent on the hospitality and real estate market

The country depends heavily on the hospitality and travel industry which represented 19% of its GDP in 2019. On the other hand, the real estate market represents 12% of GDP. The pandemic has put increasingly more pressure on both pillars of the economy, hospitality, and the real estate market. GDP will be materially impacted in 2021 and the following years. If the real estate market collapses, GDP can slide significantly. This overdependence on the two sectors will be Portugal’s Aquiles heel. Tourism in Portugal has been growing at a fast pace, since the turn of the millennium. 

Number of tourist arrivals in PortugalSource: Statista

Recently with COVID-19, the decrease in tourist arrivals has been felt all throughout the economy. Although it is slowly recovering to previous levels, it is still very far away from what it was in 2019.Source: TE

Job market

The over-dependence on the hospitality, and real estate sector meant the pandemic impact was greater than in other European countries. When we look at the data of furloughs, combined with moratoriums, we can see that Portugal is the European country with the largest percentage of workers on furlough. It also has the highest percentage of credit moratorium among European peers. Over 17% of the active population have been either laid off, furloughed or had their salaries cut since the pandemic started.

To add to that there are over 400,000 unemployed, nearly 8% of the active population. Given the country’s fragile position the housing market is expected to go through a sharp decline, once the consequences of Covid-19 start to take effect.

The median net income has seen a meager increase of 4.5% from 2010 to 2017. Only Greece, Italy, Cyprus, and Spain had a worse evolution in their median salaries. This is another reason why the country remains uncompetitive, compared to their European peers. The main reason for the lack of growth in the median salary is the fact that Portugal has only been able to grow an average of 0.6% annually over the last 15 years. In turn, over 21% of the Portuguese population is at risk of poverty.

Source: Buildup

Why the Portuguese cannot afford housing?

In order to assess housing affordability, Deloitte calculated the multiple annual gross salaries needed to purchase a 70 sqm dwelling. Surprisingly Portugal is the European country where it would only be necessary four gross salaries to purchase a 70 sqm dwelling. But the data can be misinterpreted because it is calculated according to the country’s average property price.

Source: Deloitte

If we take into account the price of properties in Lisbon, where nearly 30% of the Portuguese population lives. An average person would need 13,44 annual gross salaries to be able to purchase a 70 sqm dwelling. 

Given the concentration of jobs in the two major cities, and the high housing prices it is increasingly difficult for Portuguese to afford housing. It is clear the Portuguese housing market, particularly in the two major cities, is highly overpriced and will be susceptible to a correction. 

How does Portugal's property bubble unfold?

Moratorium effect

The government’s solution for the problems caused by the pandemic has been to consent to moratoriums on loan repayments. The problem is that the government has decided to extend the loan repayments moratorium until September 2021. The total amount of credit under the moratorium in Portugal is a staggering €41.5 billion, which is about 20% of GDP in 2020. Only surpassed by Italy with €115.6 billion, and Spain with €57.9 billion. 

However, the comparison is unfair, due to the population being much higher in both countries. Italy has 60.36 million people, and Spain has 46.94 million. Portugal has a population of 10.28 million, and if we divide that by the amount of credit in moratorium we reach ~€4,036 per inhabitant. Italy has ~€1,915 in moratorium per inhabitant, and Spain has ~€1,233. Portugal even compared with Italy has over twice the amount of moratorium credit per inhabitant. 

We should take into consideration that the average gross salary in Portugal in 2020 was €1,418. Compared with €2,442.00, and €2,279.00, in Italy and Spain respectively. The size of the moratorium debt bubble, coupled with the rapid increase in housing prices could burst the Portuguese housing bubble. This has led Standard & Poor’s to put out a warning on worsening asset quality across Portuguese banks.

Prices are set to decline by the end of 2021

Despite the effort, the loans will have to be repaid. Unless jobs are created, the moratorium will not fix the problem – It is just delaying “judgment day”. This is the main reason why the market has been able to sustain its prices and has not collapsed. It is clear that the pin that will pop the bubble is the end of the loan moratorium expected in September. The moratorium has even helped Portugal's housing bubble get bigger. It is uncertain when it will take place but it seems that towards the end of 2021 we should start seeing prices declining.

The bottom line on Portugal's property bubble

A few key factors have helped create Portugal's property bubble. The lowest mortgage rates, combined with the inflow of foreign capital, and the population concentrated in Lisbon have made prices skyrocket in the region. Coupled with the increase in tourist arrivals in Portugal. Many are also enticed to invest in properties, for short-term renting.

There are also a few key factors that will make the bubble implode. On one hand, we have a fragile economic situation in the country. Large debt, in both the private and public sector, and in households. A real estate market that gives the impression that there are not many houses available because they are not for sale on the market. When in fact Portugal is by far the European country with the highest number of houses per inhabitant.

At this point, the only thing supporting the bubble is the moratorium and government grants to individuals and companies. Once this ends, there will be no way to stop the implosion that is coming. Banks in the region, with high exposure to the housing market, are facing high risks. Portugal's property bubble is expected to deflate during 2022 and should start once the credit moratorium ends.

Featured image source: usmoneyreserve