Are We in a Housing Bubble? Empirical Evidence From Portugal

This paper investigates whether housing price bubbles emerged in Portugal’s two major metropolitan areas — Lisbon and Porto — and whether price pressures in central municipalities have spilled over into neighboring municipalities. We employ a quantitative approach based on the present value model, testing three hypotheses regarding affordability, speculative behavior, and spatial contagion. Affordability was analyzed using the housing affordability index (price-to-income ratio). Housing bubbles were identified if rental yields fell below mortgage interest rates (measured with T-tests). The spillover effects were identified using the Granger causality test. The results show a substantial decline in affordability in both metropolitan areas. Lisbon reached an affordability index of 24.5 years of net income to purchase a standard dwelling (up from 13.8 in 2017). Porto also sees a significant rise to 19.1 years. While no widespread housing bubble was detected, localized speculative signs appeared in Lisbon and Oeiras, where housing yields temporarily fell below mortgage rates. Both metropolitan areas have widespread spillover effects, especially in Porto's neighboring municipalities, showing that the affordability constraints depart from the central municipality but affect neighboring municipalities. Policymakers can benefit from these conclusions to address the housing affordability problem with metropolitan-level policies instead of national-level or municipal-level policies, as they are being addressed today.