According to a report by idealista, with house prices consistently rising in Portugal the country is facing a real estate bubble with real potential of bursting.

Buying a home is getting more and more expensive, with prices rising since mid-2013, as shown by data from the National Statistics Institute (INE). This reflects the dynamism of the Portuguese residential market, but also the lack of houses compared to demand. For five consecutive years, house values ​​on the Portuguese market have shown annual variations greater than the value at which the European Commission (EC) considers that a market is at risk of a price bubble, as Eurostat pointed out in August 2021.

And it is not the only entity to reach this conclusion: “After the third quarter of 2017, there may be signs of exuberant price formation in the Portuguese residential market”, concludes a CaixaBank study published in January 2022. This means that Portugal is at risk of a price bubble.

Price bubble in Portugal

The solution seems to be in raising interest rates on home loans, which are now at historic lows, attracting many families to buy a home. A possible rise in key interest rates by the European Central Bank (ECB) has been talked about in recent months. But Christine Lagarde, the president of the ECB, went public last November saying that it is “highly unlikely that the conditions will be met to raise interest rates in 2022”. The truth is that an eventual rise in interest rates depends on inflation – which is currently on the rise in the eurozone – and on how long the high prices will persist in the market.

Supply and demand imbalance

Due to an increasing imbalance between housing supply and demand there are “signs of a potential overvaluation of house prices” in Portugal, warns the EC and there is still potential for overvaluation.

This perfect storm was due to the combination of several factors that boosted demand for the Portuguese residential market. Houses have appreciated in value from the pandemic and families have managed to save up the necessary savings to buy a house or to apply for a housing loan. And, secondly, the financing conditions for home purchases are now more inviting – especially given the low interest rates.

However, the supply of homes has not kept up with the explosion in demand. CaixaBank's analysis shows that since 2006, less than 20 new homes are built in Portugal for every 1,000 homes. The data therefore shows that “there was no excess supply of new homes exerting downward pressure on house prices”, the study concludes.