House prices in Portugal “remain overvalued”, says Brussels

"Housing prices have continued to rise significantly in Portugal, in contrast to most other EU countries," warns the European Commission in a recent in-depth analysis of the country's policies. Although growth has slowed, prices "remain overvalued".

"According to the Commission's estimates, the overvaluation of housing prices has increased to around 30 per cent, reflecting the strong nominal growth in housing prices over the past year," the document reads. For Brussels, this scenario reflects a "negative impact on housing affordability, especially for vulnerable groups", as well as an increase in the burden of housing costs. 

Even so, it says, and despite the "sharp rise" in housing prices and the estimated overvaluation in recent years, "much of the cross-border investment in housing mitigates internal risks".

"Over the years, much of the financing related to property purchases has been linked to foreign direct investment or the commercialisation of residential property in the context of booming tourism. As a result, part of the strong increase in housing prices has not been driven by domestic factors and is not linked to domestic indebtedness," the organisation points out.

The Commission expects house price growth to moderate in the short term and a sharp fall in house valuations is "unlikely".

"Interest rates remain high, despite recent signs of a slight easing of financing conditions. The expected increase in real household income should partially offset the impact of interest costs on housing affordability, along with government measures adopted to support vulnerable households," adds the report.

Commission warns of households' "high exposure" to variable interest rates

Another risk identified concerns the "high exposure" of households to variable interest rates, which "substantially" increases interest charges. According to the European Commission, "loans for house purchase account for almost 80 per cent of the total volume of bank loans to households".

"The cost of financing for new loans for house purchase increased from a historic low of 0.8 per cent at the beginning of 2022 to above 4 per cent at the beginning of 2024. Despite the sharp decline in the proportion of mortgages with variable interest rates in recent years, the majority of mortgages continue to either have variable interest rates or mixed rates, usually with a fixed rate for a period of one to five years, then switching to a variable rate," says the commission.