Buying a Property in Portugal: the Pros and Cons

Portugal is hardly a wallflower when it comes to the international financial crisis, in fact it is one of the most talkled about markets in the world, unfortunately for all the wrong reasons. The economy continues to contract, and despite the fact that the property market never had a boom, it has and is having one of the worst crashes in the history or capitalism and house sales.

During the year to end-May 2012, the average property price in the country plunged by 8.9% to €1,047 per square meter (sq. m.), based on the figures released by Statistics Portugal (INE). When adjusted for inflation, property prices actually dropped by 11.3% over the same period. But people are still buying holiday homes in Portugal, some purely as a lifestyle choice, but others as a investment to rent out when not in use. Here are the pros and cons of buying Portuguese property.

The Cons

Prices:

As you will see prices below, prices is in both the cons and the pros sections. This is because while falling prices makes for some seriously good bargains, it also makes the market very risky and uncertain, which is a big turn off for investors at the moment. Because of hyper-inflation and currency fluctuations, cash is devaluing, and when investors put money into property they usually want something that will hold its value and therefore keep their cash safer than cash.

The Mould

As in a mould that’s hard to break. Portugal not having had a boom may give us undervalued property and a strong banking system, but it is important not to forget the reasons why Portugal never had a boom. This is down to its sluggish economy for the decade going into the noughties, and the strict rental controls on the market, which all but make price growth illegal for the most part. With Portugal now stuck in austerity, it will find it even harder to break the pattern of sluggish growth.

The Pros:

Climate:

Asking about the climate of Portugal is a bit like asking about the color of the sand on the world’s beaches, it varies from place to place and time to time, and Portugal’s climate is the same. It varies considerably from one region to another and is influenced by the relief, latitude and proximity to the sea. Areas closer to the sea have the slighly cooler summers, but milder winters, with winters being paritcularly mild in the Algarve. Inland areas have the hottest summers, but slightly colder winters, although the winter temperatures are still mild compared to the rest of Europe.

In the Azores the weather is mild all year round because the climate is influenced by the islands’ latitude and by the Gulf Stream. The latter also affects the sea temperatures making the seas around Azores warm enough for nautical sports all year round. Likewise in Madeira, which has a very subtropicalesque climate, because of its geographical position and mountainous relief. Madeira’s climate is almost perfect with summer temperatures of around 26c and winter temperatures not dropping below 19c.

Prices:

As I said, Portugal never experienced a boom during the boom years, in fact, prices grew by jusy 9% between 2003 and 2007, which is a fall of 9% after inflation (in real terms). So, while property in the likes of the UK and Spain, where prices grew much faster property became very overvalued, and in the former remains overvalued to this day, but property in Portugal is comparatively undervalued. With prices still falling, undervalued is a strong term, but it is an accurate one; Portugal property is undervalued based on comparison to rental prices, and on comparison to other European countries, i.e. compare prices in Lisbon to the likes of Paris etc.

This makes for some fantastic bargains in Portugal, especially with prices still falling.

Finance Available:

No boom for Portugal has another plus now, there was no irresponsible lending and so the banking system never collapsed, and so the banks have continued to lend throughout the downturn. Foreigners can still get mortgages in Portugal, and while it’s not the 100% LTV desperation fest we are seeing in Spain, it s no more difficult to get a mortgage now, than it was before the crash.

Round Up:

As you can see, the cons are pretty much only going to put investors off buying property in Portugal, while the pros will pull in holiday home buyers. And that is probably about the size of it at the moment, holiday home buyers can get some good deals, but investors are probably gonna steer clear.

Are Foreigners Buying Property in Portugal

As the global financial crisis and its love-child the EU debt crisis continue to claim scalps, one of its first scalps, Portugal, continues to languish in economic darkness despite its hefty EU/IMF bailout to bandage up its scalp.

You look at Cyprus and Portugal and they are both heading down the same dark road of misery, but with one difference that matters to you property blog readers… foreign property sales. Yes, foreigners are still buying property in Portugal.

While foreign sales of Cyprus property came to a near complete standstill very early in the crisis, foreigners have never really stopped buying property in Portugal. This is because of a number of factors:

  • Portuguese property prices never boomed and so still presented and presents good value for money
  • The Portuguese banks never loaned irresponsibly and so weren’t left in a coma by the crash. The remaining liquidity meant and means foreigners can still get mortgages on Portuguese property.
  • Portuguese property has held its value much better than most markets, and this made and makes it still a safe asset to put money in, especially compared to bank savings, which are continuously making negative returns due to low interest rates, high inflation and volatile forex conditions.
  • Portugal’s status as an affordable alternative to Spain, with all the above, and the consistent love affair with the Algarve. This is especially important because of the target market, golfers and wealthy lifestyle buyers have been much more active in foreign property markets than the speculative investors that drove the boom in Spain.

You can probably fill in a couple more if you are a Portuguese property buyer. Whatever the reason, Portugal property was one of the first property markets in world to bring positive reports in the national and industry press, when Knight Frank reported a surge in demand from foreign (mostly Irish) buyers, and their report was confirmed by other prominent sources.

While foreign demand has continued for Portugal property, it has dipped considerably and this pressure has led to price cuts and some great deals being offered for discerning buyers, including finance of up to 80% LTV.

Portugal Makes it Easier for Expats to Take Tax Breaks

I can just imagine one of those signs that points at you no matter where you are in the room, although they would have to use today’s technology as this sign would need to point right at your wallet. Portugal wants your money, or rather it wants the money of wealthy expats. In a bid to entice more of them to put their money into Portugal, it has relaxed its expat tax rules.

Three years ago, a special tax rate for non-residents of 20 per cent on income generated in the country was introduced by the government. Foreigners’ income was also exempt from Portuguese taxation, though expats could still be liable for tax in their home country.

Making no bones of its intentions even then, Portugal limited the new “perks” to high net worth individuals (HNWIs) or “high value-added” and to have been Portuguese residents for less than 5 years.

They also had to prove that they had lived and paid tax in their home country before moving to Portugal and during their time living in Portugal, with documents from their own tax authority. But now, this hoop-jumpery is no longer neccesary in order to qualify for the tax breaks, expats simply need to sign a declaration saying that they were previously resident in another country. This now opens the possibility of moving to Portugal for those who may have moved around the world, or who may not be on the best of terms with their own tax authority.

Portugal Property: Down but Not Out

Portugal, Portugal, Portugal he says, sucking in air. Or maybe it should be: dearly beloved, we are gathered here today to celebrate the life of Portugal.

Portugal is in a right old mess, it is having the bust, even though it never had the boom.

  • 2003 – 2004, house prices rose by an average of 6.2% y-o-y (3.3% in real terms)
  • 2005 – 2007, prices rose by an average of 1.25% (-1.3% in real terms)
  • 2008 , prices fell by an average of 4.7% (-7.1% in real terms)
  • 2009, prices fell by an average of 2.7% (-1.9% in real terms)

If its boom was lacklustre, its bust is certainly making up for it. According to the Instituto Nacional de Estatistica (INE) prices fell 19% in 2011, a statistic beaten in its attrocity only by the 20% drop in the number of contracts for the purchase and sale agreements of real estates, also from the INE. Construction is in the toilet and the general state of the economy is poor (rapid intake of breath).

But it is not all bad… The latest data from the INE shows that the rate of decline is slowing, bank appraisals for May showed prices down 8.9% year on year, and in June the rate of annual decline fell to 7.9%.

But more importantly, this is Portugal for god sake, and no matter what happens to the economy Portugal will still have its charms for holiday makers. The unshakable love for the Algarve that is shared by so many holidaymakers will scarcely even be touched by the economic malaise. And actually, the only data I can find that breaks prices down into regions is from the INE in 2010, and shows that prices were actually growing year on year in Q2 2010.

For all those people who love the Algarve, there has never been a better time to buy property there. A quick breeze through FindaProperty.com shows litterally dozens of properties in the £50-£80k mark, which would have been in the £120-£200k mark during the boom. What’s more, because Portugal’s banking system is still in relatively good shape, one can still secure finance to buy properties in Portugal, usually up to about 80% LTV.

And finally, we have the ace in the hole. According to the latest reports, the Portuguese rental market is in much better shape than the sales side.

So, if you are a lover of Portugal don’t dally and risk missing the opportunity of a lifetime. Prices look to have fallen about as far as they are going to, so get your skates on and buy now.