House prices in Portugal will continue to rise, albeit at a slower pace than in recent years, following the general trend in Europe, according to forecasts by Standard & Poor's (S&P). After the boom, prices are expected to grow by 5% this year and to settle at 4% in 2020-2021, having reached a peak of 12% in the first quarter of 2018. Economic conditions should remain "broadly favourable", as should the demand by foreign investors.
The US financial rating agency says that homes in Portugal "are still relatively cheap" and attractive to foreigners, given the tax incentives such as gold visas and non-habitual resident status that they can enjoy in the country.
Their most recent report states that imbalances between supply and demand persist in Portugal, since investment – even while it is advancing at a fast pace – is not enough to meet housing needs that have not yet recovered from pre-crisis levels.
Why is there a slowdown in house prices in Portugal?
The increase in prices in 2018 clearly slowed down, from 12% in the first three months of the year to 8% in the third quarter. According to S&P, the macro-prudential measures introduced by the Bank of Portugal (BdP), which tightened the restrictions for getting mortgages to buy homes, and the lack of accessibility to housing, were factors that contributed to this deceleration in house prices.
The findings of the US financial rating agency, which seeks to map out the current market outlook, signal that price increases above disposable income growth have gradually "eroded" the purchasing capacity of local buyers.
According to S&P, stable economic growth, a fall in the unemployment rate and rising household income are all factors that continue to support active demand for housing, but they also highlighted the importance of foreign investment for contributing to the creation of a "dynamic" market.
External demand will continue to sustain the market
S&P predicts a slowdown in economic growth and slower growth in productivity in Portugal. "The labour market is expected to continue to improve, even if profits are likely to be smaller," reads the report.
The deterioration in accessibility and "stricter financing standards" also suggest a downturn in demand, adds the agency, which points to a further weakening of demand for mortgages.
Tighter rules on short-term holiday rentals may push some domestic and international investors away, although other factors stimulating foreign buyers' interest in Portugal are expected to remain "largely intact".