New Housing ‘Shock Plan’ in Portugal: What it Means for Lagos & the Western Algarve

The Portuguese government, led by Prime Minister Luís Montenegro, has recently approved a new package of measures—dubbed a ‘shock plan’—to address the ongoing national housing crisis. These sweeping changes aim to boost supply, stabilise the rental market, and increase affordability.

While some measures have been widely praised, others, particularly those affecting non-resident buyers and the new rental caps, have sparked lively debate across the real estate sector. As specialists in Lagos and the Western Algarve property market, we’ve reviewed the key proposals and their potential impact on our beautiful region.

Applauded Moves: Incentivising Construction and Landlords

Two main incentives designed to increase the housing supply have been met with strong approval from developers and builders:

• Reduced VAT for Construction: The government is reducing the VAT (Value Added Tax) rate from 23% to 6% for the construction of homes for sale up to €648,000, and for rental properties with rents capped at €2,300 per month. This reduced rate will be in place until 2029 and is a long-requested measure that could help lower construction costs and encourage new development in the Algarve.
• Rental Tax Relief: To incentivise property owners to place more homes on the long-term rental market, the IRS tax rate on rental income will be reduced from 25% to 10% for leases of at least three years, provided the rent does not exceed the new ‘moderate’ ceiling of €2,300. This is coupled with an exemption from the AIMI (Additional Municipal Property Tax) for these rental properties.

These measures are positive steps that may encourage more properties in the Lagos area to enter the long-term rental market, which is crucial for local residents.

The Controversy: ‘Moderate Rent’ Cap and IMT Surcharge

Not all measures have been welcomed with open arms. The new plan introduces two highly debated changes:

1. The New ‘Moderate Rent’ Ceiling

The concept of ‘affordable rent’ is being replaced by ‘Renda Moderada’ (Moderate Rent), with a nationwide monthly limit set at €2,300.

• The Criticism: Critics, including tenants’ associations, argue that a national cap of €2,300 is too high and out of step with the average Portuguese salary, potentially pushing rents up towards this new ceiling rather than stabilising them. The government, however, argues this limit is necessary to include middle-class families in high-cost areas like Lisbon and Porto and to ensure geographical reach.
• Algarve Impact: For the Western Algarve, where rental prices can be high, particularly during peak season, it remains to be seen how this ceiling will influence long-term rental market pricing and availability.

2. Increased IMT for Non-Resident Buyers

The most significant change for our international client base is the planned increase in the IMT (Municipal Property Transfer Tax) for non-resident buyers (excluding Portuguese emigrants).

• The Rationale: This measure is designed to curb demand from overseas buyers, who often purchase properties at prices significantly above the local average, thereby easing pressure on the domestic housing market.
• Sector Concerns: Real estate associations have strongly criticised this move, warning that it sends a negative signal about foreign investment, which is vital to the economy and has historically focused on higher-value properties that don’t directly compete with affordable local housing.
• The Lagos Perspective: While Lagos and the Western Algarve are highly sought-after international destinations, the majority of properties purchased by non-residents are higher-end homes, not the lower-priced properties needed by local families. We believe foreign investment is a core pillar of our region’s prosperity and we hope the final implementation of this tax considers the broader economic contribution of our international clients.

Simplified Licensing and Capital Gains Relief

Two other important measures include:

• Licensing Simplification: Plans to reduce bureaucratic hurdles and shorten deadlines for construction licensing have been universally praised as a way to speed up development and quickly bring new homes to the market.
• Capital Gains Reinvestment: Homeowners who sell a property will be exempt from Capital Gains Tax (Mais-Valias) if they reinvest the entire sale amount into another property for a ‘moderate rent’ lease.

Sunny Steve’s Viewpoint

The new ‘shock plan’ represents a clear effort by the Portuguese government to tackle the housing crisis by focusing on increasing supply and offering incentives.

For our clients in the Lagos and Western Algarve area, the tax relief for construction and landlords is a positive step. However, the proposed increase in the IMT for non-residents is a point we will be monitoring closely as it moves through the legislative process.

At Sunny Steve Real Estate, we remain committed to providing the best advice, ensuring our clients—both residents and non-residents—are fully informed of all legal and fiscal changes affecting the purchase and sale of property in this stunning part of Portugal.