Despite relative stability, housing markets “remain vulnerable to economic fluctuations that can impact home prices,” such as recessions, changes in interest rates and changes in employment.

This is the warning issued by Brussels in a detailed analysis of Portugal, as part of the Autumn Package. In the document, the European Commission highlights the “remarkable resilience” of real estate in the country, but considers that the residential segment “continues to deserve close monitoring”, given the “still insufficient” supply.

In the surveillance report on the country's economic situation and, more specifically, on the real estate market, Brussels indicates that the number of completed accommodation in Portugal grew by 12.3% in the second quarter of 2024, after a 5.7% drop in the previous quarter, and that construction permits increased by 6.6%, after a “sharp drop of 19.4%” compared to the previous quarter. However, despite the reported increase in residential construction, the Commission emphasises that “the supply of housing is still insufficient to keep up with demand”.

Sharp Drop “unlikely”

Brussels notes that during the last seven years, “house prices have almost doubled”, reflecting sustained demand and limited supply, but considers that a sharp drop “remains unlikely”.

In the first half of 2024, only around 35% of housing transactions were financed through credit which, in Brussels' opinion, highlights "the substantial role played by cash buyers and non-resident investors", something that "helped to protect the market from fluctuations in borrowing costs.”

Furthermore, in the report it states that limited housing supply, combined with rising construction costs and labour supply shortages, “reduces the likelihood of a significant price correction in the near term.”

The European Commission considers that “Portugal’s real estate market has demonstrated remarkable resilience in recent years”. One of the main factors supporting this stability is the “relatively low LTV ratios across mortgage portfolios, with only 6% of loans exceeding an 80% LTV ratio.”

“This suggests that banks are well positioned to absorb potential falls in property prices, without incurring significant losses.”

Despite this, he notes that the residential real estate market in the country “continues to deserve careful monitoring”. Brussels recalls that the increase in housing prices in recent years “was supported by the strong presence of non-resident owners and buyers in the market, as well as supply bottlenecks”, but that, even so, these price increases “were not accompanied by proportional growth in family income", a scenario that exacerbated "affordability problems and increased uncertainty about long-term price developments”.