The International Monetary Fund (IMF) recently highlighted a critical issue in Portugal’s housing market: properties are estimated to be overvalued by about 20%. Despite a slight dip in prices, the IMF cautions that this overvaluation poses a risk, especially for banks facing potential defaults and non-performing loans, reported Portugal.com.
During the IMF’s annual meeting, Europe Director Alfred Krammer shared insights with the Portuguese news agency ‘Lusa’. He noted that this is a trend visible in several European housing markets, raising concerns for financial stability.
Recent social and economic challenges and the infusion of foreign investment have led to a perfect storm in the Portuguese real estate market, with reduced supply, higher construction costs, and inflation all playing a part. This situation has, in turn, nudged banks to increase their interest rates.
Krammer commended Portuguese banks for their robustness but advised them to brace for the impact of these changes on homeowners, especially as 90% of mortgages in Portugal have variable interest rates. He suggests financial institutions build a safety net to manage the growing risk of loan defaults.
Addressing the broader housing crisis, Krammer pointed out the urgent need to improve access to affordable housing and rental options. He expressed concern that the current government measures in Portugal might be insufficient for long-term resolution, being more of a temporary fix.
Emphasizing the need for sustainable solutions, Krammer advocates increasing the supply of social housing to safeguard the most vulnerable groups in society, who are increasingly at risk in the current climate.
This has several implications for foreigners looking to buy property in Portugal:
- With house prices potentially overvalued by 20%, foreign buyers might face higher costs than what might be considered fair market value.
- The overvaluation presents a financial risk, as there’s a possibility that the property in Portugal could decrease in value, especially if the market corrects itself.
- The high percentage of variable-rate mortgages in Portugal means that foreign buyers opting for a mortgage should prepare for potential increases in interest rates, which could affect repayment amounts.
- Given the concerns raised, there could be future changes in government policies regarding housing, which might impact foreign investors, such as changes in taxes, rental laws, or foreign investment rules.
- Foreign buyers should consider these factors carefully and possibly seek financial and real estate advice before making property investments in Portugal.
