The European Systemic Risk Board (ESRB) has released its latest review of Portugal’s residential real estate sector, highlighting several emerging vulnerabilities that warrant close attention from financial institutions, investors, and policy stakeholders.
Key Risks Identified
- Persistently overvalued property prices, rising since 2016.
- High household debt levels, albeit declining.
- Weak demand for new home loans with narrow interest rate spreads.
Despite these vulnerabilities, the ESRB considers the measures implemented by the Bank of Portugal to be appropriate and proportionate, classifying the overall risk to the financial system as moderate.
Impact of Regulatory Measures
The ESRB acknowledges that the 2018 macroprudential rules have improved market stability. These include tighter controls on loan-to-value ratios and borrower debt-service capacities.
By the end of 2022, however, average mortgage maturities must be reduced to 30 years. New regulations take effect as of April 1.
Post-Pandemic Credit Concerns
During the pandemic, a significant number of mortgages were under moratorium. As support phases out, there’s concern about potential deterioration in loan quality.
With many property deals conducted without domestic financing, Portugal may need to recalibrate macroprudential tools in a downturn.
Balancing Policy with Market Pressures
There is no intention to impose further financial burdens on borrowers, particularly in a market distorted by foreign demand and rising property prices.
Market Resilience and Signs of Recovery
Despite the pandemic, the market remained resilient. Property prices rose by 8.6% in 2020, following 9.3% in 2019.
While transactions fell by 22% in Q2 2020, they rebounded to 2019 levels by year-end. An increase in building permits since late 2020 suggests that housing supply may rise.
Mortgage Lending Trends
Mortgage growth was 2.4% in August 2021. Domestic credit finances only about 40% of transactions, a figure largely unchanged since 2017.
However, there are signs pointing to a possible recovery in domestic lending activity.
Borrowing Costs Remain High
Although interest rate spreads are narrow (0.8% in August 2021), borrowers in Portugal face some of the highest APRs in the EU.
These include not just interest, but also account and insurance costs.
Household debt rose to 93.6% of disposable income in Q1 2021, up from 69% of GDP in 2020.
Conclusion
Portugal’s housing market remains fundamentally strong but faces a complex mix of risks and regulatory challenges.
Continued monitoring and policy flexibility will be critical as domestic and international conditions evolve.