Cost of living in Portugal: House prices in exceed salaries by almost 40%

House prices continue to rise faster than wages in most of the 38 countries of the Organisation for Economic Cooperation and Development (OECD). And Portugal comes in fifth place on this list, with house prices surpassing salaries by almost 40%. This is not a new scenario, but it has been getting worse in recent years. In this article, idealista/news takes a closer look at OECD data and shows how house prices and disposable incomes in Portugal have evolved over the last ten years.

The evolution of house prices and salaries across the world

The evolution of house prices in recent years has suffocated many families in several countries around the world. This is mainly because salaries have not kept up with this growth, leading to a cost of living which is highly unbalanced. This is what the ratio between house prices and disposable income of families living in different OECD countries shows. The most serious case observed in the third quarter of 2021 is the Netherlands, where house prices exceed income by 48.3%. And just behind is the Czech Republic and New Zealand, where this difference is 40.4% in both countries, followed by Luxembourg (40.3%). Portugal comes in fifth place, where home values exceed wages by 39.3%.

There are 11 countries out of 31 with known OECD data, where house prices exceeded salaries by more than 20.8% in the July-September 2021 period, which is the OECD average. The latest data also reveals that of these, 8 see housing values exceeding household disposable incomes by 30% or more. Even so, it should be noted that there are still places where house prices do not exceed family budgets, namely in South Korea, Italy and Finland.

House prices have increasingly exceeded wages in the OECD

What the data also shows is that this reality has worsened in all 31 OECD countries with available data. The largest year-on-year increases of all were seen in the Czech Republic and Australia, countries where the ratio of house prices to disposable incomes rose by 19.6% between the summer of 2020 and the same period in 2021. In addition to these, another 5 OECD countries recorded annual increases of more than 10% (New Zealand, the Netherlands, the USA and Lithuania). The smallest increases were recorded in Finland (0.3%), Italy (1.9%) and Poland (2.8%).  

House prices and salaries in Portugal

Focusing on Portugal in the European map, it is clear that this scenario also worsened between these two periods. The ratio of house prices to wages on national territory rose from 134.1 in the summer of 2020 to 139.3 in the third quarter of 2021 (i.e. +3.9%), thus reaching the highest value of the ratio since 2018 in the summer of last year. This means that house prices continued to grow faster than wages even during the pandemic. 

How have wages and house prices evolved in Portugal?

By doing simple maths, it is possible to see the difference: the national minimum wage rose from 635 euros in 2020 to 665 euros in 2021, an evolution that translates into an increase of 4.7% (+30 euros). But house prices have risen much more: the latest data from the National Statistics Institute (INE) show that house prices showed an average annual variation of 9.4% in 2021 compared to the previous year. That is, house prices rose 4.7 percentage points more in a year than the minimum reference wages in Portugal.

How much have wages and house prices increased in ten years?

From 2010 to 2021, the minimum wage in Portugal has increased by 40% from 475 euros a month to 665 euros. Compared to the 2022 salary of 705 euros, the difference is 48%. This is according to data from the Directorate General of Employment and Labour Relations (DGERT) and the Ministry of Labour, Solidarity and Social Security in Portugal. 

What is also certain is that the Portuguese continue to have a purchasing power well below the European Union average. This is because in 2021 the Gross Domestic Product (GDP) per capita was 74% in Portugal, while the average of the 27 was 100%, according to data released by Eurostat this Wednesday.

How have house prices evolved in Portugal?

The prices of houses in Portugal have accelerated by more than 50% between 2010 and the second quarter of 2021, according to Eurostat data published last October. And rent rose by 20 per cent between these two periods. This means that house prices increased more than rent in Portugal between these two periods, and also that both the market for buying and selling homes and the rental market have become increasingly less accessible to the pockets of Portuguese households.

The high demand for houses on the market - which has only increased 1% in ten years, according to JLL - is one of the reasons for the rise in housing prices over time. And families' savings, allied with low interest rates on mortgages, also explain the high demand for homes during the pandemic, according to the International Monetary Fund (IMF) in a recent analysis. Added to all this is the fact that homes have become very important during the pandemic, especially spaces with larger areas inside, and balconies and gardens outside.

What can we expect for the future?

The scenario could soon change. This is because inflation is currently on the rise in the Eurozone (it reached 5.9% in February 2022) and is getting even worse with the war in Ukraine. And this scenario could further increase house prices and on the other hand reduce the disposable income of households, further widening the already existing gap between the two.

The conflict between Russia and Ukraine could also further escalate construction prices, a scenario that could push up house prices making them even more unaffordable. This is the opinion of Manuel Reis Campos, leader of CPCI and AICCOPN, who told idealista/news: "If the increases in construction costs continue to materialise, they will inevitably be reflected in house prices and in the cost of maintaining them. 

What's more, if the European Central Bank (ECB) goes ahead with a hike in key interest rates, mortgages - particularly variable-rate mortgages indexed to Euribor rates - will become less attractive this year. On the other hand, the Portuguese are losing purchasing power with the continuous and generalised increase in prices (already being felt, above all, in the supermarket and in fuels). With monthly disposable income being reduced by inflation, and salaries not keeping up, the appetite for buying a house could also decrease in the future.