The Portugal Housing Crisis

29 Sep 2023 min de leitura

Portugal's Housing Crisis

What has been the effect on the Algarve property market of the suspension of new AL Licenses?

Portugal has one big problem! It's become a victim of its own success.
Portugal's accomplishment in attracting enormous amounts of foreign investment has sparked a housing crisis which has hit world headlines. The socialist government's response has been their 'More Housing' (Mais Habitação) bill, which has set out to stop the AL rental license, sending foreign buyers into a panic.
But there is enormous opposition, most significantly from the President, Marcela Rebelo de Sousa, who has vetoed the bill. So where are we now and what do property owners on Boavista need to know?

How did the housing crisis start?

The Financial Assistance Programme granted by the EU and the International Monetary Fund (IMF) in May 2011, gave Portugal financial assistance worth €78 billion.
The rush to drag Portugal out of the financial crisis and put the country on the global investment map has led directly to a housing crisis, with the local population struggling to afford accommodation in the big cities and tourist areas. Tens of thousands of people took to the streets of Portugal on 1 April for the country's biggest housing protest.
Agustín Cocola-Gant, a research fellow at Lisbon University's Institute of Geography and Spatial Planning, offered a four-word summary of the crisis: "The situation is crazy." He was quoted in the Guardian: "Some families aren't sending their children to university because they can't pay for a room for them, and young professionals earning €1,000 a month – which is the average salary – are finding it impossible to live."
The deregulation of the property market between 2009 and 2012 saw rent controls and lifetime tenancies scrapped. Developers were offered fiscal incentives for renovating abandoned and derelict buildings without any requirement to guarantee a percentage to be given over for social housing.
The issuing of "golden visas" that handed out residence permits in exchange for buying properties worth €500,000 or more, the introduction of the tax-saving "non-habitual residency scheme" for foreigners, and, most recently, the creation of a digital nomad visa to allow well-off foreigners to work remotely and pay a tax rate of just 20% have all played a part. So too – perhaps most obviously – has the snapping up of flats to be converted into lucrative short-term rentals.

Portugal's addiction to foreign investment has distorted the housing market in a country where the monthly minimum wage is €760 and 50% of people earn less than €1,000 a month.

The 'Mais Habitação' (More Housing) Bill Explained

In order to encourage the change of properties from Local Accommodation (known in Portugal as AL or Alojamento Local) to the long-term rental market, António Costa's Government has inserted a series of measures in its "More Housing" package, which has generated controversy in the sector. One of them is the suspension of new AL licenses in urban areas until 31 December 2030. AL property owners believe it will "turn back the clock on 15 years of progress" for the sector.
However, municipal councils will ultimately have the deciding power over issuing new AL licenses – these may be suspended should the municipality declare a "housing shortage" and for as long as the declaration remains in effect. Each city must also create its Municipal Housing Charter, finding a "balance" between housing, holiday units, student accommodation, commerce, industry, and other activities.
The government's 'Mais Habitação' (More Housing) programme was approved in parliament on 19 July. The package of measures aimed at tackling Portugal's housing crisis was approved with votes in favour from the ruling Socialist Party (PS), which holds a parliamentary majority, despite every opposition party voting against it (PSD, Chega, Iniciativa Liberal, PCP and Bloco de Esquerda) or abstaining (Livre and PAN). The opposition parties brought several of the amendments they had tabled – and which were rejected in the parliamentary debate – to a vote in the final plenary session, but the PS rejected them all.
Watching from the galleries were those supporting the short-term holiday rentals (Alojamento Local, or AL) sector who wore black t-shirts to demonstrate their disapproval of the new legislation. When MPs got up to vote, the group left parliament, stamping their feet as they exited the building, which prompted the parliament's speaker to interrupt the vote until the noise ended.
Portugal's President Marcelo Rebelo de Sousa vetoed the 'More Housing' bill on Monday, 21 August 2023, criticising the lack of party consensus on the issue. In his letter addressed to the government, he commented and gave ideas on some of the issues raised by the bill.
The veto forced the Socialists to present the law to parliament for discussion again but not to make any changes. However, the national press would like to see the bill reviewed.
The President of the Republic has a power that allows him to make a political or legal veto when he disagrees with the bill's legality or considers it not to be a good way forward for the country. However, parliament always has the last word. Although the President of the Republic is the head of state, Portugal's semi-presidential regime allows parliament to confirm a bill rejected by the President. The majority the PS has in parliament will enable them to implement this bill regardless of the President's veto.

Parliament once again approved the bill on Friday, 22 September 2023, implementing legislative changes to rents, local accommodation, vacant properties and taxes with only the PS voting in favour. However, the Prime Minister António Costa Silva guaranteed at the parliamentary committee on Economy, Public Works, Planning and Housing that "No local accommodation license will be withdrawn from anyone. They will be suspended for new local accommodation only in high-density territories", guaranteed In low-density areas, which include 165 municipalities and around 70 parishes, the AL will continue to develop."
The Minister of Economy also highlighted that the municipalities will have a "more active role", underlining that there has to be a balance between housing, local accommodation, industry and commerce. "The discussion will continue and we will see if, in the end, we have a balanced package," he said.

What changes are planned to the AL License?

AL properties that are not in use may lose their licence unless the owner submits an income declaration within two months after the law comes into effect.
All licences currently in force remain valid.
AL registrations issued until the new rules come into effect will cease to be valid on 31 December 2030. After that, they must be reevaluated and can be renewed for periods of five years. The decision of renewal will be the responsibility of the municipalities.
The creation of the Extraordinary Contribution to Local Accommodation (CEAL) will now be set at 15% (a reduction on what was previously proposed) and will only apply to apartments. The tax rate will vary according to the property area, the income from its operation, the evolution of rental prices, and the urban pressure of the area where it is located. CEAL will not be applied to Local Accommodation establishments located in low-density areas.
AL property owners considering switching their property to the long-term rental market will benefit from income tax (IRS) and corporate tax (IRC) exemption on rental income until 31 December 2029.

Why is there so much opposition?

Alojamento Local (AL) property owners have been fighting the government's proposed changes to holiday rental laws for months. The government has presented the changes as a way of 'freeing up' more houses in a bid to tackle the country's housing crisis. But, this has been highly contested.
Eduardo Miranda, President of the Alojamento Local in Portugal (ALEP) association, told the Algarve Resident. "These changes are turning back the clock on 15 years of progress because the state is making it impossible for owners to rent their properties legally. We know that demand for these holiday units has always existed, and AL brought it over to the legal market, creating jobs and paying taxes along the way. Now we are taking a huge step back." He further warns of the "destructive" nature of the holiday rental changes and that the most significant impact will be felt in the Algarve."
The opposition argues that the new legislation will do nothing to solve the housing crisis. Most AL properties will continue to be used as holiday accommodation, driving property owners back to the "unregulated rental market."
He also warns of alienating foreign investors. "When laws are being changed all the time and the rules of the game are altered halfway through", investors will start to "question" whether Portugal is the right place to invest. Portugal, especially the Algarve, was probably one of Europe's biggest success stories, having converted a seasonal activity into a legal business. But these changes will act as a huge discouragement for the sector".

In fact, the bill has been counter-intuitive. Soon after the Socialist Executive announced the new measures that will touch Local Accommodation, Lisbon City Council noted that licence applications were on the rise. Between 16 February and 7 March, 58 applications were submitted, a number four times higher than in the second half of 2022, when an average of 3 AL licence applications were registered per week, according to the Portuguese newspaper ECO."
Many also argue that the bill seeks to 'cover up' the government's lack of spending on affordable housing. Correio da Manhã calls on the government to respond by investing in the state-regulated housing market: "The package actually contains some good measures, but it mainly serves as propaganda for a government that in its eight years in office has made the problem of housing shortages worse, without doing anything to address it. ... The problem can only be solved through more construction and increased public supply. Both the government and the local authorities, which fill their coffers with property taxes, must do more. ... They must provide affordable housing."

One of the most controversial measures of the plan, which Prime Minister António Costa has tried to downplay, is "coercive leasing",: which will only apply to apartments considered "derelict" for at least two years. There has been fierce opposition to this, with anti-government Facebook groups being formed in Lisbon where members post all the derelict government buildings. In reality, it will be difficult to enforce with owners simply drafting a sham contract with a family member or friend.

However, there is likely to be a fight-back and it remains to be seen if the Lagos câmara will implement all of the changes recommended by the bill if it considers it is not in the municipalities financial interest to do so.