Great value and good yields in Portugal, where house prices continue to rise

January 08, 2018


Portugal’s housing prices continue to rise strongly, fuelled by surging demand as well as improved economic conditions. Property prices in Portugal rose by 4.84% (3.26% in real terms) in November 2017 from a year earlier, to an average price of €1,144 (US$1,373) per square metre (sq. m.), based on figures released by Statistics Portugal (INE). After more than three years of depression, house prices in Portugal started to recover in 2014.

In Lisbon metropolitan area, property prices were up by 4.9% (3.3% in real terms) y-o-y in November 2017, to an average of €1,386 (US$1,664) per sq. m.

House prices rose in all the country’s 24 urban areas. Amadora recorded the highest increase of 12.88% during the year to November 2017, followed by Coimbra (12.82%), Odivelas (12.62%), Oeiras (12%), Cascais (11.65%), Matosinhos (9.84%), Leiria (9.83%), Loures (9.17%), Sintra (9.01%), and Funchal (8.41%).

Strong house price rises were also registered in Vila Franca de Xira (7.75%), Santa Maria de Feira (7.72%), Maia (7.59%), Vila Nova de Famalicão (7.5%), Almada (7.47%), Seixal (7.22%), Gondomar (7.02%), Setúbal (6.79%), and Braga (6.75%).

Modest house price increases were seen in Guimarães (5.67%), Lisboa (5.51%), Porto (5.28%), Barcelos (3.74%), and Vila Nova de Gaia (3.54%).

By property type:

  • Flats prices rose by 5% (3.4% in real terms) y-o-y in November 2017
  • Villa prices rose by 4.9% (3.3% in real terms) y-o-y in November 2017

Demand is rising strongly. In Q3 2017, the total number of housing transactions rose by 23% to 38,783 units from a year earlier, while transactions value surged 34.4% y-o-y to €4.86 billion (US$5.83 billion), according to INE. “Portugal’s property market is booming once more!” says Chris White of the real estate firm Ideal Homes Portugal. “Sales have increased hugely this year and we’ve seen a significant shift in buyer profile as increasing numbers of investors realize the potential of the Portuguese real estate sector.”

Clearly the new wealth tax introduced this year, applicable to higher-valued properties, has in fact had a negligible impact on the luxury housing market.

There are no restrictions on foreign property ownership in Portugal and transaction costs are generally low.

Portugal will grant a 5-year residency permit to non-EU citizens who buy a minimum of €500,000 worth of property. The permit allows holders to work or study, as well as to travel in Schengen countries. They can opt to apply for permanent residency after five years.

In Q3 2017, the Portuguese economy expanded by a modest 2.5% from a year earlier, from annual rises of 3% in Q2 2017, 2.8% in Q1 2017, 2.2% in Q4 2016 and 1.8% in Q3 2016, according to INE. The economy is expected to grow by 2.6% this year, up from last year’s 1.5% expansion and the highest growth since 2000.

Property prices in Portugal remain below peak levels

All regions of Portugal have experienced significant house price falls since late 2007. And despite some recovery in 2009, house prices started to fall again in the last quarter of 2010. Prices only began to recover in Q4 2014, after 13 consecutive quarters of y-o-y house price declines.


  Average price (€/sq. m.) Y-O-Y change (%) M-O-M change (%) Change from peak (%)
PORTUGAL 1,144 4.9 0.3 -2.8
AM Lisboa 1,386 4.9 0.3 -4.3
Norte 1,016 5.8 0.0 1.8
Centro 957 7.3 0.9 -3.0
Alentejo 964 3.8 -0.7 -8.8
Algarve 1,447 7.7 -0.2 -1.4
Azores Islands 1,008 2.4 1.9 -7.7
Madeira 1,300 6.5 0.7 -9.1
Source: Instituto Nacional de Estatistica (INE)

In November 2017, Alentejo was still 8.8% down on its peak, while AM Lisboa was down 4.3%. House prices in Centro were 3% down, and in Algarve 1.4% down. Norte is the only exception, with house prices now 1.8% above the previous peak.

In the autonomous regions of Madeira and Azores Islands, house prices remain 9.1% and 7.7% down from the peak, respectively.

The house price boom that swept most of Europe and the developed world from the mid-1990s to 2006 completely by-passed Portugal, except in the Algarve:

  • 2003 - 2004: house prices rose by an average of 6.2% y-o-y (3.3% in real terms);
  • 2005 - 2007: prices rose by an average of 1.25% (-1.3% in real terms);
  • 2008: prices fell by an average of 4.7% (-7.1% in real terms);
  • 2009: prices fell by an average of 2.6% (-1.8% in real terms);
  • 2010 - 2012: house prices fell by an average of 3.1% (-5.5% in real terms);
  • 2013-2014: house prices dropped by an average of 1.5% (-1.5% in real terms);
  • 2015: house prices rose by 4.5% y-o-y (4% in real terms), and;
  • 2016: house prices rose by 4.8% y-o-y (3.9% in real terms.

Portugal average price dwellings euro sqm

Why did Portugal miss the boom? Largely because of sluggish economic growth. The country has grown by an average of just 0.2% annually over the past 15 years.

In 2009, the economy contracted by 3%. Although it grew by 1.9% in 2010, Portugal’s GDP fell again by an average of 2.3% annually from 2011 to 2013. The economy expanded by a meagre 1.4% in 2016, after growing 1.6% in 2015 and 0.9% in 2014.

Portuguese property is very inexpensive.

Portugal average price dwellings type

If we were to take account of inflation, these price declines would be larger. Currency falls are another factor. The 9.5% appreciation in the value of Euro against the US Dollar in the past two years is still not enough to offset the 21% decline from 2013 to 2015.

From the perspective of the foreign buyer, Portuguese property is astonishingly good value. Algarve, which is known for its Mediterranean beaches and golf resorts, had the most expensive housing in Portugal, with an average house price of €1,447 (US$1,737) per sq. m. in November 2017. It was followed by Lisbon Metropolitan Area and Madeira, with average house prices of €1,386 (US$1,664) per sq. m. and €1,300 (US$1,561) per sq. m., respectively. Global Property Guide’s Lisbon square metre house price research finds that Lisbon city-centre prices are higher, at around €2,500 (US$3,000) per square metre for 120 sq. m. Lisbon apartments in November 2017. On the other hand, a 120 sq. m. apartment in Algarve is priced around €1,800 (US$2,160) per sq. m.

Portugal’s house price to GDP per capita ratio is one of the lowest in Europe, according to Global Property Guide research (see table).  Again in terms of square metre prices, Portugal has some of the lowest prices for city-centre property in Europe, according to Global Property Guide research (see table).

Demand is surging

Portugal housing transactions

In Q3 2017, the total number of housing transactions in Portugal rose strongly by 23% to 38,783 units from a year earlier, according to INE. Likewise, the value of transactions surged 34.4% y-o-y to €4.86 billion (US$5.83 billion) over the same period.

In Q3 2017:

  • Existing dwellings: the number of transactions increased 24.8% y-o-y to 32,864 units while transactions value soared 38.7% y-o-y to €3.93 billion (US$4.72 billion)
  • New dwellings: the number of transactions rose by 14% y-o-y to 5,919 units while transactions value increased 18.7% y-o-y to €933.36 million (US$1.12 billion)

Construction activity rising, but still way below peak levels

Portugal licensed new constructions

Construction activity in Portugal has been in decline since 2002. In fact, the number of licensed dwellings in new constructions plummeted by about 90% to 6,785 units in 2014, from 65,650 units in 2007, according to the INE. Licensed dwellings plunged by an average of 27% per year from 2007 to 2014.

However there have been signs of recovery recently. The number of licensed dwellings in new constructions rose by 20.9% y-o-y to 8,383 units in 2015 and by another 35.7% y-o-y to 11,372 units in 2016.

During the first ten months of 2016, the number of licensed dwellings in Portugal surged 25% to 11,690 units from the same period last year. Lisbon (60%), Madeira (42%) and Azores Islands (34.1%) had the largest increases in the number of dwelling permits for family housing in the first ten months of 2017 from the previous year. Strong increases were also seen in Norte (28.5%) and Centro (26.3%). Only Algarve and Alentejo experienced declines of 33.3% and 4.4% over the same period.

Total dwelling stock was 5,932,697 units in 2016, up slightly by 0.12% from a year earlier, according to INE.

New wealth tax

Portugal housing stocks

The Portuguese government introduced a new wealth tax in 2017, officially called Adicional Imposto Municipal Sobre Imóveis (AIMI). It is an annual tax, charged on the Valor Patrimonial Tributário (VPT) of higher-value properties, regardless of where the owner resides. Under the new wealth tax, the owner is liable if his/her property (or share of a property) is worth over €600,000.

The tax rates are as follows:

  • 0.4% for properties held by companies/corporate structures
  • 0.7% for properties held personally or by un-administered estates up to €1 million
  • 1.0% on the value of the holding in excess of €1 million

The €600,000 allowance is available to all individuals and estates, except to those tax affairs that are not in order. Married couples and civil partners can have a combined allowance of €1.2 million. Properties used in tourism or for commercial, agricultural, or industrial purposes are exempt.

However, all properties in Portugal are still subject to Imposto Municipal Sobre Imóveis (IMI), the Portuguese equivalent of UK council tax, of between 0.3% and 0.8%.

The previous stamp duty tax on residential property valued at over €1 million has been abolished.

Lisbon’s rental yields are good

Portugal exchange rates

Lisboa apartments continue to obtain good rental yields, ranging from 5.4% to 6.2%, according to the Global Property Guide rental yields research of November 2017. As a reminder, the rental yield is the total percentage return you would earn as a landlord, when renting out your property. Smaller apartments tend to be most profitable. A 50 sq. m. apartment in Lisboa returns around 6.32% rental yields, whereas a 250 sq. m. apartment returns only 4.5% rental yields. Good rental yields are also to be had from villas in Lisboa ranging from 5.45% to 6.05%, and again the rule is the larger the villa, the lower the yield.

Gross rental yields from apartments in Algarve are moderate, ranging from 3.5% to 3.8% in November 2017. Algarve villas have even poorer rental yields, at around 2.84% to 3.04%.

In Lisboa, rents from apartments range from about €12 to €16 per sq. m. per month in November 2017, so that a 120 sq. m. apartment can be rented for about €1,578 per month. Villas in Lisboa rent out for around €9 to €11 per sq. m. per month, and a 450 sq. m villa can be rented for around €4,185 per month.

Rents from apartments in the Algarve lower, ranging from around €4 to €6 per sq. m. per month, so you can expect monthly rental income of about €620 from a 120 sq. m. apartment. Villas in the Algarve rent for around €6 to per sq. m. per month, so you can expect monthly rental income of about €2,356 from a 300 sq. m. villa.

In terms of price to rent ratios, Global Property Guide research suggests that Lisbon is exceptionally good value.

Interest rates are astonishingly low

Portugal interest rates

Interest rates on housing loans have continuously declined since 2012. Interest rates on housing loans fell to 1.017% in November 2017, from 1.032% in November 2016, 1.219% in November 2015, 1.409% in November 2014, and 1.425% in November 2013, according to the INE. This was partly due to the recent rate cuts of the European Central Bank (ECB), from 1.5% in October 2011 to 0.05% in September 2014 and to 0.00% in March 2016.

The mortgage market is extremely sensitive to interest rate changes, since more than 93% of new mortgage loans have variable interest rates or initial rate fixation of less than one year, according to the European Mortgage Federation (EMF).

Shrinking mortgage market

Portugal’s mortgage market grew from 41.5% of GDP in 2000 to 65.6% of GDP in 2012. But housing loans have declined for the past six consecutive years (-0.5% in 2011, -3% in 2012, -3.6% in 2013, -3.9% in both 2014 and 2015, and 3.2% in 2016), and are expected to have declined again by around 1.5% in 2017. 

Portugal housing loans

As a result, the mortgage market has shrunk to just around 51.6% of GDP in 2016.Despite very low interest rates, housing loans declined further by 1.5% in November 2017 from the same period last year, to €94.1 billion (US$112.9 billion).

Pent-up rental demand - new tenancy law

Portugal has one of the highest owner-occupation rates in Europe, partly caused by generous government mortgage subsidies having helped push up owner occupation from 52% of all housing in 1981, to 74% in 2013 and to 75.2% in 2016.

Meanwhile the private rental market has shrunk from 39% of total dwelling stock in 1981, to currently about 20%. The social rental sector is small at around 3% of the total housing stock, or 16% of total rental stock.

The shrinking of the private rental market was caused by tenancy laws that discouraged landlordism by giving tenants controlled rents and protecting them against eviction. As a result, young people either live at home, or pay exorbitant key money, or buy an apartment. This has led to a considerable pent-up demand for rental housing.

Lease law 31/2012 provides more protections to landlords

Law 31/2012, which was passed by the Portuguese government on August 14, 2012, aims give more protection and rights to landlords. Previously, the country’s urban lease regime was strongly pro-tenant. The Portuguese government approved the new legal measure to reform the rental market, one of the conditions for the country’s €78bn bailout agreement from the IMF, ECB and European Commission.

Changes in the law include the following:

  • The new legislation allows parties to agree on any specific period for the duration of the lease, instead of the previous minimum of 5 years. If a period is not defined in the contract, the lease is assumed to be set for two years, which can be renewed automatically.
  • There is now a procedure for revising rental values: (1) landlord proposes a new rent to the tenant; (2) the tenant accepts or suggests a counterproposal; (3) if no agreement is reached the agreement may be terminated, and the landlord pays five years’ worth of rent as compensation. Exemption is given to tenants with financial difficulties, who enter a transitional regime with small rent increases for five years. A special transitional regime is also applicable to tenants over 65 years old, or with 60% disability.
  • As with the previous law, in case of death of the tenant, the lease will be transferred to the spouse, common law spouse, or relatives, but now only for a period of two years. The tenant’s beneficiaries are not allowed to hold purchased or rented property within the same municipality, or in Lisbon and Oporto’s case in neighbouring municipalities either.

The new law also strengthens the landlord’s ability to terminate a lease agreement:

  • The landlord has the right to terminate the contract if the tenant fails to pay two consecutive rents and still hasn’t paid the rents due at the end of the third month.
  • If the tenant fails to pay on time (or more than eight days after the due date) for four times in a year, the landlord can terminate the contract.
  • The landlord is allowed to terminate the contract by notifying the tenant of its intention to terminate the contract with at least two years notice.
  • If the landlord wishes to demolish or undertake works on the property, he may also terminate the lease.

The law aims to update the rents of older contracts, as well as amending the Law 6/2006 or the New Urban Lease Act (Novo Regime de Arrendamento Urbano – “NRAU”) – an attempt to solve old lease issues.

The new legislation also includes a special procedure on evicting tenants who do not vacate the property on the specified date by the court or the contract. It also creates the National Office for the Leases (Balcão Nacional de Arrendamento) where a landlord may apply so as to notify the tenant to vacate the property.

Landlords felt the new laws were long overdue. According to the President of the Lisbon Property Owners’ Association, Luis Menezes Leitao, foreigners find the old law hard to believe, and he recounts that some people in central Lisbon pay rents as low as €5 a month.

Economy improving

Portugal gdp inflation

In Q3 2017, the Portuguese economy expanded by a modest 2.5% from a year earlier, after annual rises of 3% in Q2 2017, 2.8% in Q1 2017, 2.2% in Q4 2016 and 1.8% in Q3 2016, according to INE. The economy is expected to grow by 2.6% this year, up from last year’s 1.5% expansion and the highest growth since 2000.

The improving economic condition comes after a series of dismal years. Portugal’s economy contracted 1.1% in 2013, 4% in 2012, and 1.8% in 2011, according to the IMF. In 2010, the economy grew by 1.9%, but in 2009 GDP contracted by 3%, after average annual growth of only 1.2% between 2004 and 2008.

Portugal was the second euro zone country to exit its bailout program in May 2014, after three years of austerity. Portugal had sought its €78 billion (US$93.6 billion) bailout program in 2011, due to the government’s inability to meet its debt payments.

Portugal unemployment

Portugal still faces a huge public debt burden of around 130.1% of GDP in 2016, from 129% in 2015 and 130.2% in 2014, according to the European Commission. The country’s public debt is expected to fall to around 126.4% of GDP in 2017 and to 124.1% of GDP in 2018.

The country’s fiscal deficit stands at 2% of GDP in 2016, sharply down from 4.4% in 2015 and 7.2% in 2014. The deficit is expected to fall further to around 1.4% of GDP this year, according to the European Commission.

Consumer prices rose by 1.5% in November 2017 from a year earlier, slightly up from 1.4% in both September and October 2017 and 1.1% in August 2017. Inflation is expected to accelerate to 1.6% this year, from an annual average of just 0.4% in the past four years, according to the IMF.

Unemployment stood at about 8.5% in Q3 2017, down from 8.8% in the previous quarter and from 10.5% during the same period last year and the lowest level since 2008. Portugal’s jobless rate averaged about 13.6% from 2011 to 2016, according to the INE.

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