Throughout this year, the Portuguese government has closed two major programs dedicated to foreign investment. On 6th October, “Mais Habitação Law” ended the real estate pathway to a Golden Visa and two days later they announced the decision to end the Non-Habitual Resident (NHR) regime, with practical effects starting in 2024.
To "replace" the NHR, a new fiscal incentive for scientific research and innovation in business development has been created, targeting "researchers and highly qualified workers" who will have similar requirements and benefits to the NHR: beneficiaries must reside in Portugal for at least 183 days a year to enjoy a special 20% IRS tax rate for 10 years, valid only for those who have not been fiscally resident in our country for the last five years. It seems to be a positive measure but highly restrictive, leaving out many talents and many qualified professionals who came to Portugal under the NHR.
Did the NHR program contribute to the rise in house prices?
The main argument used by the government to end this program, established in 2012, is that it contributed to inflating the housing market in Portugal and to the current crisis in this sector.
But before analysing this issue, I emphasise that the features that make Portugal one of the best countries to live and work in remain. At Athena Advisers, we will continue to anticipate trends and provide our clients with unique investment and lifestyle opportunities across this wonderful country.
That said, it is important for us to clarify that the housing market in Lisbon and Portugal is not inflated due to the NHR. If it had any impact on the rise in house prices, it was minimal and localised mainly in city centres, specifically in some neighbourhoods and larger residential units.
The price increase in Portugal was widespread. It occurred not only in the city centre but also in suburban areas of major cities and throughout the country. Therefore, it is a macroeconomic issue and not a matter strictly and directly related to the NHR.
Only 7.9% of foreigners in Portugal bought a house and obtained NHR status.
According to the Tax and Customs Authority, there were over 35,000 NHR beneficiaries in Portugal in 2022, mostly from the United Kingdom, France, Brazil, and the United States.
A 2021 survey by the NHR Global Association revealed that 40% of NHR holders had acquired property in Portugal, while 60% were renters. The same survey also indicated that each NHR holder spent an average of around 1 million euros on property purchases in Portugal.
According to the National Institute of Statistics (INE), 110,158 foreigners acquired properties in Portugal between 2012 and 2019. Therefore, if we consider that 22,000 foreigners obtained NHR status during the same period [see table] and only 40% bought properties, there are only 8,000 foreigners acquiring properties and obtaining NHR status. This means that, out of a total of 110,158 foreign buyers, NHR holders represent 7.9% of the market over those eight years.
It's a very residual number to be able to inflate real estate prices throughout the country. They are even fewer than Golden Visa buyers, who represent 8%.
So, what is inflating house prices?
While the price increase has been driven by low interest rates, this movement generalised throughout Europe, particularly after Brexit, when European capital began to inflate - the main problem and the main reason for the rise in housing prices in Portugal is the lack of new supply. According to the National Institute of Statistics (INE), the number of new building permits issued in Portugal in the first half of 2023 was 24% lower than in the same period of 2022. There are no new buildings coming onto the market, and new projects linger for years in municipal councils to obtain licences.
And here, we face another major problem that is inflating real estate in Portugal: the idleness of the Public Administration. This is an issue that is not being resolved in the best way. I believe that the government still needs to meet the demands of a country that has been growing economically. But no one wants to solve this because it doesn't bring votes.
The money that was entering the country through the NHR program is probably the best we have ever had. That is, this is an investment from entrepreneurial people, businesspeople, and active individuals who move to Portugal and start new businesses, open offices, employ people, and consume goods and services. And this has a very positive impact on the Portuguese economy.
Precisely in the field of economics, Portugal has exhibited good performance compared to other European countries. In 2022, the country's GDP grew by 2.6%, a value higher than the EU average of 2.5%. Similarly, the unemployment rate in Portugal is also relatively low, at 5.8%.
Furthermore, the technological boom continues. The technology sector in Portugal grew by 12% in 2022, becoming one of the fastest-growing in Europe [Source: Portugal Digital], and it is now the 10th largest exporter of ICT services in the world [Source: World Trade Organization].
In our opinion, the growth of the Portuguese economy is also due to foreigners who saw Portugal as an interesting market, believed in our country and our economy, and chose to live and invest here. At Athena Advisers, we have several examples of this: people we have followed from Brazil, the United Kingdom, South Africa, France, Sweden, the United States and more... who came here and created restaurants, hotels, technology companies, and many other businesses.
After all, what is the real reason for ending the NHR?
In our opinion, from an economic-financial point of view, there is no valid argument that justifies ending the NHR. We consider it an absolute mistake to assume that the NHR is to blame for all the problems in Portuguese real estate. It is just being used as an excuse.
Therefore, the end of the NHR regime is a short-sighted measure, based on a preconceived idea, a populist measure with which the government intends to blame someone (or something) to gain votes, sacrificing programs that contributed to the country's economy and projection of Portugal in the world.
What is the impact of the end of the NHR?
We believe the impact of the end of the NHR regime will be enormous not only in real estate but in the entire country's economy.
To these investors who have contributed to the growth of the Portuguese economy, the government is sending the wrong message, and no one can criticise them if they stop believing in the national market, which is always changing the rules, and if they stop believing in a country whose Executive blames foreign investment for inflating housing prices and causing the crisis in this sector. Many of them may even leave Portugal at a huge cost to our economy because, as mentioned earlier, in addition to real estate investors, they are entrepreneurs, businesspeople, employers, and consumers.
In terms of real estate promotion, there is already a stock crisis in the market, and with the end of the program, many projects may be shelved. In addition to the losses to the economy and employment, this will further exacerbate the housing crisis and inflate prices, as there will be even less supply.
At Athena Advisers, we want to believe that this more pessimistic scenario does not materialise, as we work every day to bring the best of Portugal and the products with the most potential to our clients.
Should some NHR rules be changed?
We know that the main issue with the special NHR regime is the fact that a foreigner with tax residency in Portugal does not have the same taxation in Portugal as a Portuguese citizen. In this respect, it is important to emphasise that at Athena Advisers, we favour equality because we are all Europeans. Therefore, we consider that if a foreigner has income in Portugal, such as income from properties located in the national territory, they should have exactly the same taxation as a Portuguese citizen.
However, we are of the opinion that if someone with income from various sources worldwide decides to settle in Portugal, they should not be taxed in the same way. Usually, they are highly qualified professionals who choose Portugal to establish themselves, contributing to the country's wealth and economy.
Therefore, it is a bonus for Portugal and that is why it would have been enough for the Executive to change some rules of the NHR program, rather than closing it entirely.