The Euribor is the benchmark rate representing the average rate at which credit institutions are willing to lend funds in the euro interbank market over a given period. Calculated daily based on quotes from a panel of twenty European Union credit institutions—and not on actual transactions—it has been the subject of considerable criticism and has accelerated reform efforts to prevent market manipulation. Although widely known to the general public, the long-term effects of its fluctuations, given the current real estate market conditions, may go largely unnoticed.

After the 2007 real estate crisis, which began in the United States but dragged the global economy down with it, policymakers—namely the European Central Bank—implemented monetary policies to revive economic activity. Among the measures adopted was a significant reduction in interest rates for institutions and private individuals. This reduction lowered the cost of money, making access to credit easier and enabling families and businesses to invest and consume more, thereby stimulating the economy.

In addition to this, Portugal has, in recent years, become a highly attractive residential destination, particularly in Lisbon and Porto. The climate, safety, gastronomy, proximity to beaches, and its role as a gateway to Europe have attracted foreign capital, benefiting property prices—especially those that meet the preferred criteria of these buyers or tenants. Property type or size seems less relevant within this segment, as it includes young people, executives, entrepreneurs, small and large families, all with varying life plans, but all seeking the same features: prime location, balcony, garden, river views, excellent natural light, comfort, and architecture.

As property prices rise for assets that meet foreign demand, a spillover effect occurs, extending even to suburban areas. Families who previously purchased the most desirable properties can no longer compete with large capital investors, yet they continue to search—either out of immediate necessity or fear that prices will rise further.

On one hand, the European Central Bank’s policy of near-zero interest rates enabled families to access higher levels of mortgage credit. With easier access to credit, families targeted properties within their budgets, driving prices upward. On the other hand, foreign investment has further fueled price increases, driven by private capital and investment funds that still view Portugal as an accessible market.

If the situation stopped here, it would reflect the normal law of supply and demand. However, the European Central Bank will have the final say in the near future of the real estate market.

At the beginning of the year, Christine Lagarde presented the latest monetary policy decisions of the European Central Bank and highlighted several key factors: shortages of materials, equipment, and labor continue to constrain production in some sectors; high energy costs are weighing on incomes and are likely to curb spending; inflation has risen sharply in recent months and continues to exceed expectations, largely due to higher energy prices, which are pushing up costs across many sectors, as well as rising food prices. Inflation is likely to remain elevated for longer than previously anticipated. Although uncertainties related to the pandemic have somewhat diminished, geopolitical tensions have intensified.

Rising interest rates will now directly impact many people with ongoing mortgages. The immediate consequence is an increase in monthly mortgage payments, already creating liquidity issues for households. From an economic and market perspective, it is well known that economies follow cycles and patterns that tend to repeat. Based on this, we can observe that the last period of falling interest rates lasted twelve years—from 2008 to 2020 (extended by the economic effects of the pandemic). A similar upward cycle could occur, leading to a subsequent reduction only decades later—meaning we may not see current interest rate levels again for approximately twenty-seven years. The duration of this cycle suggests that banks may even limit mortgage terms to 25 years, further restricting access to housing credit.

With rising interest rates, families will pay higher monthly installments to banks without corresponding wage increases. This could result in additional monthly costs ranging from €300 to over €1,000. While hypothetical, this scenario is entirely plausible. A return of Euribor rates to 2008 levels would more than double monthly mortgage payments.

However, the story does not end here. The rush to buy property is based on a deeply rooted fallacy in our society—that real estate never loses value and house prices always rise. When circumstances and needs change—such as family growth, divorce, or job relocation—it becomes clear that modern life involves more frequent housing changes than in previous generations, often with an unsustainably high financial burden relative to income. Most people assume that if mortgage payments become unaffordable, they can simply sell the property and generate liquidity to repay the loan. But this may not go as expected.

As interest rates rise, the cost of money increases. This raises both the total and monthly cost of new mortgages, reducing the number of families able to invest in housing. As a result, demand adjusts its criteria. Sellers may need to lower prices to generate liquidity, leading to a downward adjustment in market prices, or risk being burdened by mortgage payments for extended periods. This natural price decline due to rising borrowing costs will be compounded by increased housing supply, as financially strained families bring more properties to market. The additional supply, combined with reduced purchasing power, will further push prices down.

This domino effect may soon lead many families into a situation where they cannot afford the mortgage on a property purchased for €500,000, with €475,000 still owed, while the property’s market value has dropped to €450,000. This scenario is not new for those who bought at peak prices and later had to sell at a loss. The reason for selling need not even be financial distress—it could be divorce, family expansion, or job relocation.

There is therefore a real risk that market conditions may lead to properties no longer covering outstanding mortgage debt—while that debt continues to grow due to rising interest rates.

In summary, the Portuguese economy and real estate market, particularly in major urban areas, may be creating a perfect storm that few fully recognize, potentially leading to a negative cycle with significant impacts on household finances and market dynamics in the near future.

Based on this combination of perspectives, at LOBA we assess the potential and robustness of each property’s market value. Rather than simply generalizing prices per square meter, we analyze the profile and purchasing power of those who wish to live in a given property—whether buying or renting—over the long term. By defining this profile, it becomes relatively easy to estimate the value range within which a property will be sold or rented across cycles. The rent paid by consumers is a key factor in calculating the expected return for investors seeking long-term rental income.

In our view, it is a mistake to base decisions on the price paid by a neighbor or friend, yet such comparisons often drive purchasing decisions among Portuguese buyers. Sale prices are frequently set based on property listings, many of which are speculative and misleading. The market lacks transparency, and many people are unaware that properties can sell for around 30% below the asking price in some cases. The average discount of 17.2% in 2020 fell to 14.1% in 2021. Others sell at or slightly above the asking price. The outcome depends on buyers’ purchasing power, the property’s alignment with demand, the seller’s level of information, and their motivation to sell.

Despite the significant weight of housing costs on household finances, most people make emotional purchasing decisions based on flawed rational arguments. As consultants, LOBA advises clients to carefully assess their financial capacity, consider fixed versus variable interest rates when financing, and analyze their personal and family routines in a practical way to define priorities and choose the most suitable property.

Delaying a home purchase may not be the best decision—what matters is having a clear strategy. On the other hand, regardless of the segment, this is a favorable time to sell, given the relative ease of obtaining mortgage credit—provided one avoids alarmism, speculation, and excessive exposure, which can wear down a property’s market appeal and lead to a sale below optimal value, especially in an increasingly unstable external environment over the past two years.