Madeira's Property Bubble - Madeira Estate

Madeira’s Property Bubble

Madeira's Property Bubble

Portugal, and as of more interest to us, Madeira, are seeing record growth in the housing market. The easing of post-Covid travel restrictions, growth and popularity of remote working opportunities and Brexit, all play a factor in the rise of Madeira’s popularity among ex-pats and tourists. Home purchase and rental prices are rising, along with fuel duty, groceries, and general cost of living. In this article, we’ll explore whether Madeira is at the peak of a Real Estate Bubble and if it will burst.   

Recently, Bloomberg concluded an analysis which it carried out on 19 OECD countries, including Portugal and Madeira, examining the house price-to-rent ratio, as well as the house price-to-income ratio, real house price growth, nominal house price growth and housing credit growth, to ascertain the stability of the real estate market.

Two factors have been identified by Bloomberg which indicate Madeira’s Property Bubble. Firstly, house prices are 56% higher than rents, and secondly, almost 47% higher than household income. The most recent quarterly data shows that the real house price in Portugal and by extension, Madeira, increased by 11.6% and the nominal house price by 9.4%. On the other hand, housing credit fell by 2%.

In January 2022, the European Commission warned there was a risk of “potential over-valuation” in the Portuguese Property Market. According to the Commission to the European Parliament, the Council, and the European Economic and Social Committee stated, “Portugal is the only Member-State where house prices have risen by more than 6% every year since 2016, consecutively.”

Apart from the European Commission and Bloomberg, the Francisco Manuel dos Santos Foundation (FFMS), Portugal’s leading economic think tank, also alerted that “Portugal’s aggregate house price index shows…excessive growth starting in the fourth quarter of 2017”.

What is driving the increase in Madeira’s Property Prices?

A study carried out by FFMS, Fundação Francisco Manuel dos Santos, determined there are several reasons why Madeira and Portugal’s real estate prices are still rising, leading to Madeira’s Property Bubble.

  • An unsustainable, higher price is being placed on properties, because of overvaluation.
  • Higher demand for property exists, sustained by an increase in disposable income and lower unemployment, especially in Funchal, and mainland Portugal’s major cities.
  • Substantial growth in Loan to Value housing credits, due to the expectation of high housing prices and fluidity in the market.
  • A lack of rigidity in the Portuguese housing market supply, which “may lead to welfare losses associated with overvaluation in the market”.
  • Growing investment and attractive short-term tourist accommodation, which provides a higher return than the traditional rental model. In Madeira, this is an even more significant factor due to the year-round demand for Alojamento Local properties.  

In addition to these observations, an increase in foreign investment has exposed Madeira to and a significant increase in housing demand. Foreign investment can be defined by a few conditions:

  • Golden Visas – Madeira, Porto Santo and the Azores are now the only regions in the Portuguese Territory where non-EU/EAA citizens can gain Portuguese Residency through investment.
  • The increase in popularity of D7 visas, driven by the United Kingdom’s withdrawal from the European Union
  • The rise in popularity of remote working (Digital Nomads)
  • And the Non-habitual Residency scheme that offers significant tax benefits over a period of ten years.

This rise in demand has been met with short supply as property owners and management companies seek to capitalise on demand by increasing prices, contributing to Madeira’s Property Bubble.

Real Estate Bubble in Portugal. What about Madeira?

Since April 2022, Madeira’s capital Funchal has become the third most expensive city in Portugal to buy real estate. The average price per square meter rose to €2,270 and the average price had increased by 20% compared to the twelve months previously.

Similarly, areas like Câmara de Lobos, Ponta do Sol, Calheta, Santana and São Vicente saw an increase in sales and demand for new property. Property along the southern coast of Madeira has increased in value at a similar rate to Lisbon, Porto and the Algarve.

Areas out of Funchal, where there have traditionally been higher rates of reported crime, are also experiencing a surge in popularity. Unobstructed Sea Views and connectivity to the Airport are driving factors in the search for land and available properties.

What else can affect property prices in Madeira?

From Bloomberg’s analysis, a real estate bubble “is an obvious vulnerability as central banks raise interest rates and mortgage repayments move higher”. Governments across the world are raising interest rates, making it more expensive to borrow capital and repay mortgages, in an attempt to stabilise markets as a response to the conflict in Ukraine.

Analysts are already demonstrating a shrinking worldwide economy, dangerously close to falling into a recession. At which time, the bursting of a real estate bubble would result in a fall in property prices, affecting household wealth, slowing future development, and damaging consumer confidence.

In the Bloomberg Economics analysis, Portugal and Madeira are especially at risk in the European economic area, while Austria, Germany and the Netherlands are also a cause for concern.

Should I Still Look to Invest in Madeira?

Investing in real estate, either to enjoy retirement years, to relocate or to reap the benefits of the tourism market, should make part of the diversification strategy concerning one’s portfolio and is, therefore, a personal decision.

When choosing to invest in Madeira’s property market, you should always consider:

  • The location of the property in relation to its main city, Funchal.
  • The amenities available within walking distance (including healthcare services).
  • The property’s accessibility to public transportation and distance from the airport; and
  • The ultimate economic objective you have for the property itself.

Where possible, you should avoid paying overinflated bubble prices. Always take the age of the property into consideration and hire an independent surveyor to provide you with a detailed structural report on the property’s condition. Research the historical sales prices for similar properties in the local area and consult with several banks or financial institutions before financing the property with a mortgage.

Madeira’s Property Bubble – Will it burst?

Madeira has benefited from strong economic growth thanks to its tourism sector and considerable foreign population. Madeira is growing in popularity, with international ex-pats and Digital nomads choosing to make Madeira their home.

Despite the above, the Regional Government of Madeira could still potentially tighten regulations surrounding short-term tourism (Alojamento Local) rentals in favour of long-term rentals for local families or that the burst of the housing bubble has repercussions similar to that of Spain’s 2008 housing crisis.

For the moment, prices are still rising, and the bubble bursting, whether in the Portuguese mainland or Madeira, is a likely risk. Investing in real estate with this in mind will enable one to make more informed decisions about their investment in Madeira, deciding whether now is the right time, or to wait and see what the next 12 months bring.

Should you I still choose to buy in Madeira?

While Madeira may still be moving towards the peak of it’s bubble, it’s still considered a sound investment. Compared to other European Cities, and areas of continental Portugal, such as Porto and Lisbon, you will still see great value for money and can expect a reasonable return on your investment.

If you’re looking to find your dream home in Madeira, or want to list your property, contact Madeira.Estate and find out how our Agents can help you find the perfect home, holiday apartment or plot of land to build on. Click here to see our latest listing.

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