The European Commission analyzes the country’s housing market and says a sharp reduction in prices is “unlikely”.
” 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%, reflecting the strong nominal growth in housing prices over the last 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, he 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 marketing of residential properties in the context of booming tourism. As a result, part of the sharp rise in housing prices has not been driven by domestic factors and is not linked to domestic indebtedness,” the organization points out.
The Commission expects house price growth to moderate in the short term and a sharp drop in housing 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,” he adds.
Commission warns of “high exposure” of households 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% of the total volume of bank loans to households”.
“The cost of funding for new home loans has risen from a historic low of 0.8% at the start of 2022 to above 4% at the start 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,” he says.
