Housing Crisis in Portugal: Inflation and Rising Interest Rates

Two factors that significantly impact the current situation are rising inflation and increasing bank interest rates. These elements have exerted considerable pressure on the real estate market, affecting buyers and renters. We, therefore, need to understand how these factors are interconnected and how they have impacted the housing crisis in Portugal.

Inflation and housing

Inflation, the general and continuous increase in the prices of goods and services, has been a concern in various sectors of the Portuguese economy. However, the real estate market is susceptible to inflationary pressures, as property prices have risen substantially in recent years. The increase in house prices and land for construction has significantly outstripped wage growth, making them unaffordable for many Portuguese families.

One of the main drivers of inflation in housing costs is the supply shortage. The construction of new housing units has not kept pace with growing demand, whether due to demographic factors or Portugal’s increasing attractiveness to foreign investors, which has created an imbalance between supply and demand, leading to rising prices across the country.

The rise in tourism also plays a significant role in Portugal’s housing crisis, as the notorious growth of the country’s tourism sector has boosted the popularity of short-term accommodation platforms such as Airbnb, leading to the detour of some properties potentially available for long-term rental to tourist purposes. This has further reduced the supply available on the residential rental market, resulting in unaffordable price increases for those looking to rent a home, especially in the regions with the highest demographics, namely Lisbon and Porto.

Rising Bank Interest Rates

Another important factor contributing to the housing crisis in Portugal is the increase in bank interest rates, namely Euribor (Euro Interbank Offered Rate). European banks use this average interest rate to borrow money from each other, calculated based on the interest rates charged by the central banks in the eurozone.

Thus, as interest rates rise, central banks tend to increase the reference interest rates to control inflation, making mortgages more expensive and suppressing access to property for many buyers.

Central banks have been adjusting their monetary policies in response to economic developments, with the European Central Bank (ECB) being no exception. The increase in the ECB’s benchmark interest rates directly affects the interest rates banks charge their customers. Given this cascading situation, it may discourage potential buyers from acquiring a loan to invest in the real estate market, resulting in lower demand in the market, directly impacting the commercial value of properties.

Impact on society

This housing crisis has had a significant impact on various strata of Portuguese society, namely:

1) On the younger generation: The difficulty of accessing housing is particularly felt by young people and middle and low-income families, who face almost insurmountable barriers to acquiring their first home.

However, the banking sector has implemented measures to aid access to credit, namely for young people up to the age of 30, the maximum credit term can be set at 40 years, while for young people over the age of 30 and equal to or less than 35, the entire credit term can be up to 37 years. For those over 35, the maximum credit term is 35 years.

In this sense, a lower monthly payment is feasible, as the loan payment is spread over a more extended period. However, the other side of the coin is that the longer the term, the more interest will be charged, culminating in a higher loan payment.

2) High rents: Tenants are also affected, as landlords can adjust rents to keep up with rising house prices, in line with the free market in the sector, making it more difficult to obtain housing through renting.

3) Socioeconomic Inequality: The housing crisis increases the disparity between economic classes, making real estate wealth an essential factor in socioeconomic inequality.

4) Economy and Investment: Although rising housing prices benefit existing homeowners, they can negatively affect the economy by limiting consumers’ purchasing power in other sectors and decreasing families’ ability to save.

Measures and Solutions

To deal with the housing crisis in Portugal, a series of measures have been adopted to reduce the negative impact on society, namely:

• Increasing supply by building new homes, especially in the areas most affected by the shortage of supply, and also,
• By regulating short-term accommodation, establishing stricter regulations for this sector;
• Also, through the implementation of tax incentives, more specifically, through the exemption of tax rates, such as the Municipal Tax on the Transfer of Real Estate, in certain municipalities, as well as the reduction of Municipal Tax on Real Estate, for situations of permanent housing and long-term leases, by municipal resolution;
• Urban renewal: Investing in urban renewal projects can improve the quality of available housing and revitalize older neighbourhoods.