MARKET STATUS
PORTUGAL: DOMESTIC RESILIENCE IN AN ADVERSE GLOBAL CONTEXT
By the end of 2025, the Portuguese economy is demonstrating remarkable resilience against an international backdrop marked by uncertainty and the slowdown of its main European partners. Banco de Portugal has revised its GDP growth projections upwards to 2.0% in 2025 and 2.3% in 2026, driven primarily by strong domestic demand, particularly private consumption and investment.
The labour market has been one of the main pillars of this performance. In the third quarter of 2025, employment reached historical highs, exceeding 5.3 million people, with year-on-year growth of 3.7%, while the unemployment rate remained low, between 5.8% and 6.3%. This dynamism, especially visible in services — notably healthcare, tourism and information technologies — has been accompanied by a recovery in real household income and a gradual easing of financial conditions.
A more accommodative monetary policy has reinforced domestic financial stability. The implicit interest rate on housing loans fell for the 22nd consecutive month in November, settling at around 3.1%, its lowest level since 2023. At the same time, the household saving rate recovered to 12.2% in 2024, approaching the European average, albeit with a strong concentration among higher-income households. This environment has supported consumption and encouraged investment, including in the real estate sector.
Despite solid domestic performance, external accounts showed some deterioration throughout 2025. The current account surplus contracted by around 34% by September, standing at 1.8% of GDP, largely reflecting the widening deficit in the goods balance. The increase in imports (+4%), particularly pharmaceuticals and automobiles, was not fully offset by exports, which were affected by weaker European demand and a decline in sales to the United States. By contrast, the services balance continued to act as a stabilising factor, with tourism reaching new highs and generating rising revenues.
On the fiscal front, Portugal maintains a favourable short-term trajectory. By October 2025, the budget balance recorded a surplus of 1.6% of GDP, supported by revenue growth outpacing expenditure, while public debt continues on a downward path. Nevertheless, structural vulnerabilities remain, including high rigidity in public spending — largely concentrated in social benefits and wages — and significant challenges in the implementation of the Recovery and Resilience Plan, particularly in the healthcare sector.
This relatively solid domestic picture contrasts with a more fragile external environment. The euro area faces economic stagnation, with German industry in contraction, while the European Central Bank adopts a cautious stance amid controlled inflation. In the United States, the “soft landing” scenario has allowed the start of interest rate cuts, although trade protectionism continues to pose risks for global partners. China, in turn, is experiencing a structural slowdown linked to its real estate crisis and weak domestic demand, reshaping global value chains through new trade alliances.
Sources: INE, BdP, BPI research, Eurostat, yahoo finance; ECB, turismo de Portugal
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Banco de Portugal has published its Economic Bulletin, highlighting “Housing market in Portugal: quantifying demographic pressures.” Below is a summary of that feature.
Over the past decade, Portugal’s housing market has been characterised by a sharp increase in house prices and rents, making access to housing progressively more difficult, particularly in major urban centres and coastal areas. This development stems from a persistent structural imbalance between dynamic demand, shaped by profound demographic changes, and a supply of new housing that has remained unable to fully recover from the historical lows recorded after the financial crisis.
Demand for permanent housing is primarily determined by the number of households, rather than by changes in the total population alone. Between 1981 and 2011, growth in the number of households was mainly driven by a reduction in average household size, associated with population ageing, declining birth rates and rising divorce rates. This process generated additional housing demand even in a context of moderate population growth.
In the more recent period, between 2021 and 2024, the nature of demand changed significantly. Net migration became the main demographic driver, with an average annual inflow of around 127,000 people, more than offsetting the negative natural balance. This flow is estimated to have generated approximately 52,000 new households per year, placing additional pressure on the housing market at a time when average household size has stabilised. This pressure, however, is not evenly distributed: it is concentrated in around half of all municipalities, particularly in the Lisbon Metropolitan Area, Porto, the Setúbal Peninsula and the Algarve, regions that together account for around 69% of Portuguese households.
On the supply side, the market is characterised by significant structural rigidity. After three decades of strong expansion between 1981 and 2011, during which an average of more than 80,000 dwellings were completed each year, construction activity collapsed in the following decade to around 11,000 units per year. Despite a partial recovery in recent years — approximately 22,000 dwellings per year between 2021 and 2024, this pace remains clearly insufficient relative to the formation of new households, estimated at around 36,000 per year over the same period. The sector’s capacity to respond is constrained by persistent bottlenecks, including low productivity, shortages of skilled labour, only partially mitigated by the use of foreign workers, who already account for around 30% of the workforce and lengthy, complex licensing procedures. In light of the shortage of new supply, the existing housing stock is often viewed as a potential solution. Portugal has one of the highest shares of dwellings that are not primary residences in Europe, at around 30% of the total stock, split between secondary residences and vacant dwellings. However, the ability of these properties to absorb excess demand is limited by several structural factors.
First, the state of repair constitutes a significant obstacle: vacant dwellings are, on average, older, with around 55% requiring major renovation works. Second, there are substantial legal and fiscal constraints. Approximately 26% of vacant properties are held in undivided inheritances or have multiple owners, complicating decisions to sell or rent. Legislative instability in the rental market and a property tax framework that places relatively little penalty on holding vacant homes, compared with transaction taxation, further reduce incentives to bring these assets to market. Finally, the strong appreciation in house prices in recent years with an average gross yield close to 9% between 2015 and 2024. this makes it attractive to retain property as a store of value, even without any economic exploitation.
Portugal’s housing market is therefore experiencing a prolonged cycle of imbalance, in which demographic demand, accelerated by immigration, has systematically exceeded the capacity to produce new housing since 2011. Although the number of vacant dwellings is significant in absolute terms, it does not constitute an immediate solution due to issues of condition, location, or the associated legal and economic constraints. The result is persistent upward pressure on prices and rents, particularly in municipalities with stronger economic and population dynamics, reinforcing the need for public policies that simultaneously promote new construction, urban rehabilitation and the effective mobilisation of the existing housing stock.
Nuno Santos, Asset Manager