While homeowners throughout most of Europe are lucky enough to secure fixed-rate mortgages, more than 93% of Portuguese mortgages have variable rates.
This is a staggeringly high rate compared to the 15% seen across the rest of Europe, and over 1.3 million families are struggling in the face of rising interest rates. The number of foreclosures are expected to go through the roof in 2023, as real wages are set to increase at a lower rate than inflation throughout the year.
It’s not just homes affected by towering interest rates and inflation, but also personal and auto loans and soaring energy prices. While Portugal has occupied a healthy bubble for several years now, seeing housing prices remain consistently high, Portuguese residents have been struggling against rising costs and now find themselves unable to afford housing in their own country.
Real estate has been a great investment opportunity, but it seems the bubble is about to burst, and those looking to invest in Portugal may need to seek alternative opportunities.
House prices in Portugal
The price of houses in Portugal has differed from the average across the EU since 2015. While price increases have slowed in the last couple of years, dipping by 5.9% in 2020 compared to, and slowing down again the following year, prices still soared throughout 2021 and 2022.
A regular Portuguese citizen has been left paying a price for a property in Lisbon that’s around 336% higher than the same house would fetch in the country. Portugal’s two largest cities (Lisbon and Porto) are around 164% more expensive than the national average.
Indeed, compared to other countries Portugal is alone in having a deviation exceeding 100%. The second highest percentage in that comparison belongs to German, which has an average deviation of 77%. The residents of Portugal are struggling against a deviation that’s more than twice the amount of Germany.
At the same time, an average house in Portugal is costing about 24x the annual GDP per capita. That data, however, is based on the country-wide average, the average in Lisbon - where around 27% of the population lives - is even higher, even factoring in slightly higher salaries in the capital.
Government intervention
The government has been taking steps to try and address the housing issues being faced by Portuguese residents, including putting an end to the highly popular Golden Visa. Yet these steps are short-term solutions to a long-term issue with both social and political consequences.
Many Portuguese families have taken steps to address the issue, with around 26% currently renting and many making efforts to repay loans. These individuals are inevitably going to see their efforts result in taxes they pay going to help families who aren’t currently being quite so prudent. Those who are overleveraging will inevitably be bailed out by the taxes of those who are being cautious and reducing their expenses and debt. The result is likely to be division and civil unrest.
Should inflation continue to rise through the second half of 2023 as predicted, further short and potentially longer-term financial destabilisation, will force the ECB (European Central Bank) to increase its terminal rate. While it’s virtually impossible to predict what this rate will be, we can expect to see a steep hike in rates, if the current inflation and Federal Funds Rate in the US plus the fact the ECB is well behind the Fed when it comes to adjusting rates. All of this is inevitably going to impact the Portuguese housing market.
Increasing Euribor rates that are affected - in the short term at least - by variable interest mortgages, are eventually set to pop Portugal’s real estate bubble. At the same time, the impending collapse is likely to put a large percentage of Portuguese denizens below the poverty line. Given the country already sees 5.5% of the population under that line and another 2.3 million at risk of poverty, this would be catastrophic.
What does it mean for investors?
For years, the property market in Portugal has presented a sound investment opportunity. Despite the fallout from the COVID-19 pandemic and the challenges created by the war in Ukraine, the Portuguese housing market remained strong throughout 2022. That resilience persisted, even in the face of sharply rising mortgage interest rates, and the price of properties and housing in Portugal continued to rise.
Yet rising rates inevitably raise the risk of a price correction. Housing prices across Portugal are set to fall by as much as 3% this year, making property a potentially poor investment. In the face of this economic crisis, investors are advised to find a better home (pun intended) for their investments. It would seem more prudent this year to invest in a well managed, globally diversified portfolio, such as Blacktower’s Nexus Global fund.
If you would like to discuss a personalised investment strategy that is in line with your preferred risk profile and personal circ*mstances, you can arrange a no-obligation complimentary consultation with one of our experienced advisers in Lisbon, or the Algarve by contacting us by telephone on +351 289 355 685 or by emailing: info@blacktowerfm.com
Disclaimer:
The views expressed on this page are those of the author and not of The Portugal News.
