Study Highlights Persistent Overvaluation in Portugal’s Housing Market Since 2017, Outpacing Spain’s Moderate Growth
House prices in Portugal have shown signs of overvaluation since early 2017, contrasting sharply with the steadier trends observed in Spain’s housing market. Between 2013 and 2023, real house prices in Portugal surged by 83%, significantly outpacing Spain’s 28% increase, according to a study published in the Banco de Portugal Economic Studies magazine.
Authored by economists Rita Fradique Lourenço, Afonso Moura, and Paulo Rodrigues, the article “Housing Market in Portugal and Spain: Fundamentals, Overvaluation, and Shocks” underscores a longstanding disparity between the two countries. The analysis reveals that, by late 2023, Portuguese house prices remained overvalued, while Spanish prices exhibited no similar signs.
Diverging Recovery Trajectories
Both nations experienced housing market contractions following the 2008 financial crisis. Between 2008 and 2013, house prices declined annually by 4% in Portugal and over 8% in Spain. However, recovery patterns diverged significantly. From 2014 to 2023, Portugal’s house prices grew by an average of 6% annually, compared to less than 3% in Spain.
The study attributes Portugal’s price surge largely to demand pressures, with insufficient housing supply to meet growing needs. By contrast, in Spain, a more balanced interplay between supply and demand has mitigated price acceleration, particularly during the pre-pandemic years.
Impact of Recent Events
Portugal’s housing market experienced a temporary slowdown during the COVID-19 pandemic, followed by a robust recovery in 2021, again driven by strong demand. However, the European Central Bank’s restrictive monetary policies since mid-2022 led to another slowdown, although prices began accelerating again by late 2023. In Spain, pandemic-era constraints modestly influenced prices, but weaker demand prevented significant increases.
Current Housing Costs and Affordability Challenges
In 2023, Portugal’s median price for family accommodation was €1,611/m², with Greater Lisbon (€2,740/m²) and the Algarve (€2,613/m²) among the most expensive regions. By Q2 2023, this median had risen to €1,736/m², a 6.6% year-on-year increase. Housing affordability has worsened drastically, with average mortgage payments now consuming 32.8% of household income, up from 23.8% four years ago. The International Monetary Fund (IMF) warns that, for the first time, median-income households are ineligible for mortgages on median-priced homes.
Addressing Supply Challenges
The study highlights the urgent need to expand housing supply to meet demand. Recommendations include reducing regulatory and administrative barriers and addressing labor shortages in construction. Programs like the government’s Construir Portugal initiative are commended for their potential to ease housing shortages if effectively implemented.
As housing costs continue to climb, the study underscores the critical importance of structural reforms to stabilize Portugal’s housing market and improve affordability for residents.
