The growth in housing and rental prices in Portugal has not kept pace with salary increases. The supply of homes has also been decreasing in the last decade. In this post, I simply want to point out how we got here and point out ways to resolve the country's housing crisis.
The dynamics of property prices have been a determining factor in the worsening of inequalities in several countries, including Portugal, where the appreciation of the housing market has exceeded salary increases. This trend also has repercussions on the rental market, one of the main sources of income for real estate investors and one of the biggest monthly charges for tenants.
Family income, property value and financing costs are crucial elements that influence participation in the real estate market, whether purchasing or renting.
The appreciation of the real estate market in Portugal from 2017 onwards resulted in a deterioration in accessibility to housing, both when purchasing and renting, particularly in the metropolitan areas of Lisbon and Porto. It should be noted that the income required to purchase an average home has increased considerably in recent years.
“In Portugal, from 2017 onwards, the appreciation of the real estate market hampered access to purchasing or renting a home.”
On the demand side, there have been significant changes in the last decade, especially in Lisbon and Porto, which increase friction in the housing market and put pressure on prices.
First, there was family restructuring that contributed to an increase in the number of households and a decrease in their size. It should be noted that the demographic evolution was heterogeneous in Portugal, with the population of the Lisbon metropolitan area growing by 1.7%, while that of Porto decreased by 1.3%.
Secondly, there was an increase in demand for housing by foreigners in Portugal. This investment was mostly carried out by European citizens, who have established and inalienable rights at national level to access the market, with golden visas representing a minority part of this investment. In the fiscal sphere, between 2009 and 2020, there was a limited universe of around 52 thousand beneficiaries of IRS reduction through non-habitual resident status.
Third, the use of the housing stock, from 2014 onwards, for tourist activities, such as local accommodation “AL” (Airbnb apartments), was another factor with a significant impact on housing prices (purchase and rental), especially in tourist areas.
“There was an increase in demand for housing by foreigners in Portugal, mostly European citizens. 'Golden' visas represented a minority part of this investment.”
Portugal, like several European countries, is a market with an inelastic supply, that is, in which it expands little in response to price rises, making them more volatile. The last decade has been marked by a decrease in the construction of new housing, partly due to the focus on urban rehabilitation, which is a longer and more complex process, financial restrictions in the construction sector and the marks left on the sector by the international financial crisis of 2008-2009 and the sovereign debt crisis in 2010-2012. On the other hand, the low elasticity of market supply in Portugal is also influenced by several fiscal and regulatory factors:
Slow processes and excessive bureaucracy in the development of real estate projects;
Instability in real estate regulation, with frequent changes to the legal framework, generating distrust and driving away potential investors;
High tax burden in the real estate sector;
The requirement for a significant amount of equity capital and interest rates, which, after a long period of reduced values, have been at high levels since the end of 2022 not seen since the sovereign debt crisis;
Unpredictability in licensing processes, due to the multiplicity of standards and interpretations, creating uncertainty for investors
“The last decade has been marked by a decrease in the construction of new housing. Supply has also been hampered by excessive bureaucracy, regulatory instability and the high tax burden, among others.”
Unfortunately, there are no immediate solutions to the accessibility problem, which will predictably continue to worsen in the coming years. Dealing with this problem requires a long-term vision and requires an approach that involves the design of coherent government and municipal policies, as well as the development of individual projects.
In that regard, here are a few solutions…
a) In the short term, the strategy must be directed towards demand-side policies, which support, within a limited and defined time horizon, families in more vulnerable situations, while the foundations of the medium-term strategy are implemented and begin to show results its effects.
b) In the medium term, a strategy based on expanding effective supply, increasing its elasticity, planning the cities we want to have, an integrated policy for the provision of sustainable transport systems and public goods and services, and providing quality housing to citizens in a sustainable, inclusive, harmonious, accessible way and with less volatility in prices and incomes.
c) Regarding demand restrictions, absolute measures to limit demand, whether in local accommodation or by foreigners, are neither effective nor desirable, due, on the one hand, to the great spatial heterogeneity of local accommodation and, on the other, the inability to implement limitations on the entry of foreigners into the housing markets and the reduced impact that these limitations would have and corresponding change in specific taxation.
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