The missing housing segment for middle-income earners, the Portugal story.

Updated: Nov 17, 2020

What causes the lack of intermediate and affordable housing in Portugal? What can we do?

affordable housing in Portugal

Cities across Europe experience substantial challenges related to affordability and flexible “fit for demand” housing stock. A growing number of people that are unable to find affordable housing in larger cities in Europe. It is especially the middle-income earners that are affected.

The lack of so-called intermediate housing is also a major issue in Portugal’s two largest cities Lisbon and Porto. The president of the Association of Real Estate Professionals and Companies of Portugal (APEMIP) stated in 2018 that there was a substantial lack of housing for the middle segment. This could be detected in the lack of supply in terms of product, location, and housing price corresponding to the needs of the middle-income earners.

Affordable intermediate housing is commonly defined by the ratio of housing costs to income, a common perception of an affordable rent is that it should not exceed 30-40% of the net income of a household (cf. Dewilde & De Decker 2014). In 2019 the average annual income in Portugal was about $21,000. In central Lisbon, thousands have been evicted from their homes—an average of nearly six families a day, due to cost pressures. In Lisbon, the average wage is currently 860 euros a month (by far the highest of any area in Portugal), while the average rent for a one-bedroom apartment is 878 euros.

The causes of the housing challenges are multilayered and complex and vary depending on the locations. The main causes include migration, tourism, management of existing housing, availability of investment and land, pricing and financing, stakeholder trust and engagement, and not least lack of suitable planning regulations.

Within the Portuguese context, some causes are more pertinent than others. A popular perception is to attribute the lack of housing to foreign investors and tourism that in turn led to a 15.9% increase in housing prices in 2018 alone. However, these factors can rather be described as a symptom and not a cause. There exists a sufficient supply of land holds and empty buildings in Porto and Lisbon. In 2011 there were approximately 1 million buildings throughout Portugal that needed repair, and around 400.000 required significant works. Access to these properties would require a collective effort from both the private and public sectors, and paired with the right government policies and urban planning regulations this could fill the housing gap by providing affordable housing for the middle class.

If the causes are not addressed the negative consequences are far-reaching. The impact of the lack of intermediate housing can be seen on the social cohesion of the cities and affects the economic performance and competitiveness of the city as well as the citizen’s well-being and quality of life. In connection with the new legislation that took force in July 2019, The basic Housing Law, Roseta, president of Lisbon's municipal assembly stated that "....lack of housing is a genuine crisis; there is an enormous strain on middle-class people—not just the poor—and there is a weight on young people,". Furthermore, she said that: “There are general laws for health, education, and social security, but never was [until now] a law for housing—we must treat it as a social right”.

What are the solutions?

Many European cities struggle to find suitable solutions to these critical urban challenges. In Portugal, various measures have been put in place over recent years, and the cities are exploring ways to increase the supply of affordable housing. The City Council of Lisbon recently approved the Lisbon Municipal Housing Rights Regulation “Habitar Lisboa”, opening up the capital's first 120 affordable homes with rents between 150 euros and 800 euros for T0-T4 apartments. The program is tailored to fit the needs of the middle class and students who seek to live in Lisbon but lack the means to do so. The conditions to be able to take part in this scheme are the following: gross household income must be between a minimum of 8,400 € / year for each income earner, and a maximum of 35,000 € / year (one person), 45,000 € / year (two people), or 45,000 € / year + € 5,000 / year for each dependent (more than two people). The program is immensely sought after and the first day alone saw 1000 registries. The municipality has announced that it plans to make more housing available for the program. However, with the massive need for affordable housing, this initiative only meets a very small percentage of the current demand.

Porto has recognized the growing problem. Porto Vivo, Portos development agency, has created a program that will allow the private sector to long-term lease public land holdings with two possible investment models, where either the leases are capped at the intermediate level or the municipality provides the land “free of charge”. However, the gap between market rent and controlled rent remains wide and makes it difficult to justify an investment with a long-lease model on public land.

Another model that is being explored is to enhance tax benefits exemptions and fast-streaming planning approvals for private developers using private landholdings. The ULI report called “Promoting housing affordability (Feb 2020)” underlines the importance of aligning the efforts of the public and private sectors and creating suitable planning regulations that support a long-term vision with clear alignment in policies at national, regional and local levels. They also stress that there is a need to align stakeholders to enable long term production of housing.

As a developer, we believe the Portuguese cities have sufficient land and building stock to create sufficient housing supply for intermediate affordable housing. Densification is key to the solution. Currently, the market valuation of the land stock is uniformly targeted for high-end luxury housing, which is both risky for investors and unsustainable for balanced urban development. Municipalities should focus on the separation of local and tourism-driven developments. Increasing building density in urban centers should be the priority of new planning regulations in combating the affordability crisis in Porto and Lisbon.