Property prices in most EU countries, including Portugal, appear to be overvalued according to the European Commission (EC).
The EC has warned that there are “signs of a potential overvaluation of housing prices in the various member states, combined with a high indebtedness of families”.
Brussels’ analysis of EU home prices “shows widespread evidence of overvaluation,” with one of the most worrying cases being Portugal, alongside Austria, Belgium, Czech Republic, Denmark, France and Germany. Currently in Portugal, the study by the EC found that a family needs more than 10 years of average disposable income to pay for a house of 100 square metres. This is also the case in 10 other EU countries, including Spain, Austria, France and Greece.
While the pandemic caused many major economies to stall, the real estate market in Portugal and 10 other member states continued to rise during this time, with increases above 6 percent. Despite the first quarter of 2021 registering house price growth of 5.2 percent in Portugal, property prices rose once again in the second quarter up to 6.6 percent.
Property prices are growing at the fastest pace seen in the last decade and represent a “risk”, especially when combined with the “high indebtedness of families”, states the EC.
With inflation rising in Europe, “uncertain adjustments” in labour markets and a possible increase in interest rates, the ability of households to pay their home loan obligations may be compromised, as these factors could exert “additional pressures” on the family budget.
But unlike the rise in indebtedness, the economic recovery is unlikely to lead to a correction in house prices, says the European Commission, although it admits that the shortage in the supply of houses could help to alleviate the situation in the short term.
According to the EC report, the “risks of downward adjustments in house prices are mitigated by supply constraints”. The “less dynamic” home supply has contributed to prices climbing, while “lower” levels of construction has also helped to reduce the direct economic impact of the correction in house prices.
According to a report by Idealista, the Banco de Portugal (BdP) made it known that the country is protected against house price alterations because an eventual reduction in house prices due to an increase in supply, for example, “will tend to be mitigated by the reduction in recent years in the household debt ratio for all income levels and by the improvement in the risk profile of borrowers”, said the BdP.