On 21 August 2023, the President of the Republic vetoed Government Decree No. 81/XV, which approves measures in the area of housing. It is important to understand the grounds for this political decision and the arguments involved in order to assess its legal implications.

“Bearing in mind the housing crisis emergency, which particularly affects young people and more vulnerable families, and is beginning to affect the middle class, as well as the need to increase the supply of housing, the President of the Republic promulgated the Decree of the Assembly of the Republic authorising the Government to significantly simplify urban planning and land-use planning procedures. However, in his future assessment of the authorised Decree-Law, the President of the Republic will continue to bear in mind the need to reconcile urban planning simplification with other values that must be safeguarded, such as the safety and quality of buildings, the accountability of those involved in the construction process and the important role of Local Government in matters of housing and land-use planning. The President of the Republic also hopes that the Government will, if possible, take this opportunity to consider bringing together, in a single legal instrument, all the currently dispersed legislation — vast in scope and, in some cases, contradictory — eliminating contradictions and obsolete provisions and improving the accessibility of legislation in the sector, as a fundamental step towards the desired simplification of urban planning. In other words, moving towards something akin to a Building Code.”

Comment: the key point of these considerations is that urban planning simplification should go hand in hand with legislative simplification. We all know that urban planning and administrative law are poorly organised, full of scattered legislation that is difficult to reconcile, forming an increasingly complex and impenetrable patchwork. The President’s call for the creation of a Building Code therefore makes perfect sense, compiling dispersed legislation and integrating it into a single, coherent body that cuts across these areas. Moreover, such integration would reduce the scope for administrative discretion in a small country with more than three hundred municipalities, which often interpret the same legal provisions differently.

The President of the Republic returned to the Assembly of the Republic, without promulgation, the Decree approving measures in the area of housing and introducing various legislative amendments, with the following message:

“Belém Palace, 20 August 2023

To His Excellency the President of the Assembly of the Republic,

I am writing to Your Excellency pursuant to Article 136(1) of the Constitution, conveying this message to the Assembly of the Republic regarding Decree No. 81/XV, which approves measures in the area of housing and introduces various legislative amendments, in the following terms:

1. The housing crisis emergency, which particularly affects young people and more vulnerable families, but is beginning to affect the middle classes, together with the need to increase the supply of housing, led the Government, six months ago, to announce an ambitious More Housing Programme, shortly after re-establishing a Ministry for Housing.

That Programme included significant administrative simplification measures, incorporated into another instrument of the Assembly of the Republic, which I have just promulgated.

Above all, however, in the eyes of the Portuguese people, it appeared to be centred on five very strong ideas:

1st – The compulsory letting of privately owned vacant homes, increasing the supply of housing;

2nd – Restrictions on local accommodation, thereby also increasing the supply of affordable rental housing;

3rd – Strengthening the role of the State in providing more housing, both directly and in cooperation with cooperatives, thereby expanding the aforementioned affordable rental scheme;

4th – The provision of public incentives to private parties in order to increase the desired housing supply;

5th – Transitional measures, including restrictions on rent increases during the launch and consolidation period of the Programme.

All of this was intended to create a rapid shock in the housing market, responding to the emergency, producing visible results by 2026 — the end of the parliamentary term — and making it possible to halt the vertiginous rise in housing costs, while waiting for mortgage interest rates, affecting one million two hundred thousand contracts, to stop their suffocating rise.

2. The presentation of the More Housing Programme ultimately polarised the debate around two central issues — compulsory letting and local accommodation. The effects were immediate:

1st – It overshadowed other proposals and measures and made a desirable broad political agreement on Housing, both inside and outside the Assembly of the Republic, much more difficult.

2nd – It gave grounds — rightly or wrongly — for uncertainty and a wait-and-see attitude among some private investors, without whom any comprehensive solution is insufficient.

3rd – It radicalised positions in Parliament, leaving the absolute majority almost isolated, criticised on one side for being declaratory in style, unrealistic and possibly unconstitutional because it placed an excessive burden on private initiative, and on the other for insufficient and timid State intervention.

As early as 9 March, I expressed my concern about the risks of excessively optimistic rhetoric, expectations that were too high in light of the deadlines, resources and administrative machinery available and, consequently, the possibility that the projected results might prove unrealistic.

3. Six months later, the present instrument unfortunately confirms those risks.

1st – Except to a limited extent, and using European funds, the State will not assume direct responsibility for housing construction.

2nd – Support for cooperatives, the use of vacant public buildings, or privately owned properties acquired or contracted for affordable rental housing involve slow bureaucracy and reliance on entities already burdened with other responsibilities, such as Banco de Fomento, or lacking the necessary resources, such as the IHRU.

3rd – Compulsory letting is so limited and slow that it appears to be merely a symbolic measure, with a political cost greater than its tangible social benefit.

4th – The similarly complex regime governing local accommodation makes it doubtful that the intended effects can be achieved quickly.

5th – Despite the corrections made in relation to compulsory letting and local accommodation, the present instrument is unlikely to restore some of the confidence lost by private investors, while the public and social investment envisaged remains limited and slow.

6th – No new measures with immediate effect can be seen to address the pressure faced by many families as a result of rising interest rates and, in numerous cases, rents.

7th – There is no broad political agreement and, without a change of direction, there may not be one by 2026.

4. Put simply, it is not easy to see where the promised supply of housing will come from with the necessary efficiency and speed.

This is an example of how a poor start in responding to a need that time has made dramatic, crucial and extremely urgent can have lasting negative consequences.

There is no obvious political recovery in the short term, despite the work involved in bringing several laws together into one and despite certain positive ideas, diluted by the substance of the solutions adopted.

In other words, all things considered, whether in relation to compulsory letting, local accommodation, State involvement, support for cooperatives, the specific means and implementation deadlines, or the complete absence of a broad political agreement or minimum party consensus, the present instrument is not sufficiently credible in terms of its short-term implementation and therefore does not provide sufficient mobilisation for the challenge that must be faced by all its essential stakeholders — public, private and social, and above all the Portuguese people in general.

I know, and we all know, that the parliamentary absolute majority can, within a few weeks, approve once again what has just been voted on.

But, as will be understood, that cannot and should not prevent the expression of a deeply held conviction and a calm but negative analytical judgement.

Accordingly, I return, without promulgation, Decree No. 81/XV, which approves measures in the area of housing and introduces various legislative amendments.

The President of the Republic

Marcelo Rebelo de Sousa”

The reasoning put forward by the President of the Republic in support of this political veto of the Government’s instrument is highly relevant, reflecting a consolidation of collective sentiment and anticipating the failure of the proposed measures, while seeking to identify the underlying reasons for this negative assessment.

We will now comment on his ideas regarding the major issues that this instrument seeks to address.

1st – The compulsory letting of privately owned vacant homes, increasing the supply of housing

When, over several decades, the State has failed to create public housing — and it should be recalled that, under the Constitution, it is the State’s responsibility to ensure that citizens can effectively exercise their right to housing — placing the burden on private owners to provide housing through the coercive mechanism of social renting is, at the very least, an act of supreme hypocrisy.

Private parties invested in the creation and development of housing stock, often intended for rental. However, successive interventions in the rental market, with constant amendments to the Urban Lease Regime, later converted into the New Urban Lease Regime, as well as to the Legal Regime governing Works in Rented Properties, distorted market rules by imposing restrictions of such magnitude — for example, freezes on rent increases, restrictions on landlords’ right to terminate leases, and the complexity and slowness of eviction proceedings — that property owners came to the conclusion that renting out their properties was no longer worthwhile.

Clearly, homes were not built to remain empty, and any owner would prefer to see their property generating income and being properly maintained. However, this situation arose because, instead of creating more controlled-cost housing for affordable rent, the State chose to intervene in existing properties by imposing rules on owners that were contrary to their interests.

This measure is confined to the major cities, particularly Lisbon and Porto, meaning that the Government does nothing to correct the disparities between the coast and the interior in an area that is so important to territorial development.

It is clear that, because it is so contrary to the natural order of things and violates the essence of the right to property, it is unlikely to produce statistically significant results in the short or medium term.

The President predicts that compulsory letting will be so limited and slow that it will amount to little more than a political and ideological symbol, without tangible social benefits, a conclusion with which we can only agree.

2nd – Restrictions on local accommodation, thereby also increasing the supply of affordable rental housing

Following the difficulties created for landlords by the legislator in the residential rental sector, some property owners were willing to invest in rehabilitating their properties, provided that they could obtain new market rents or, alternatively, allocate those properties to a new emerging activity: local accommodation, a phenomenon driven by tourism and by Portugal’s growing profile in international markets.

Local accommodation grew very rapidly, particularly in Lisbon, followed by Porto and subsequently the Algarve, progressively spreading throughout the rest of the country.

At the same time, in order to attract capital from international investors, the Golden Visa scheme, or residence permits for investment, was created and, for several years, was almost exclusively focused on real estate. Both activities were profitable and generated very significant capital inflows into our country.

Sooner rather than later, a political process began in which these investments were demonised, on the grounds that they were causing accelerated gentrification in the major cities, forcing out local residents and contributing to speculative increases in housing sale prices and rents.

The local accommodation legislation was subsequently amended several times in order to limit the growth of the phenomenon, particularly in coastal urban areas, and municipalities also adopted regulations suspending or limiting new licences. Despite the fact that this phenomenon had already been significantly mitigated, this measure introduces further restrictions on the activity — in an attack on the principle of private initiative and freedom of establishment — even providing for its eventual termination.

However, it is not to be expected that owners operating in the local accommodation market, who are accustomed to attractive rates of return and well-maintained properties, will be interested in an alternative such as affordable renting, where State-regulated rents are significantly lower than those they currently receive, benefiting tenants who may remain indefinitely and introducing rigidity and the risk of non-payment.

Furthermore, as the President states, the complexity of the local accommodation regime and of the transition to affordable renting — even with some tax relief — raises concerns about the effectiveness of this measure.

The supply of affordable rental housing could only increase if, for landlords, the transition from the local accommodation model to affordable renting were financially neutral and did not involve any economic sacrifice. It is clear, however, that the tax measures provided for will not achieve that result, given their limited scope.

3rd – Strengthening the role of the State in providing more housing, directly and in cooperation with cooperatives, thereby expanding affordable rental housing

The President states that, except to a limited extent and with European funds, the State will not assume direct responsibility for housing construction.

And he is right.

Portugal does not belong to the group of Northern European countries with a tradition of allocating significant levels of public investment to the creation of social, affordable or mixed housing. Portuguese Governments have always faced budgetary constraints and therefore chose to encourage private-sector construction by combining this with financial policies promoting mortgage credit for the purchase of owner-occupied permanent homes and tax incentives (Housing Savings Plans, exemption from IMI municipal property tax for the first five years, etc.).

Exceptionally, they promoted certain Special Rehousing Programmes to address critical situations, but these never amounted to a national housing policy.

Some housing will be created through the allocation of Recovery and Resilience Plan funds, although even this will have no significant impact.

On the other hand, he also acknowledges that support for cooperatives, the use of vacant public buildings, or privately owned properties acquired or contracted for affordable rental housing involve slow bureaucracy and reliance on institutions already burdened with other responsibilities, such as Banco de Fomento, or lacking the resources required for the task, such as the IHRU.

Despite having existed for only a few years, Banco de Fomento does not appear to have properly got off the ground, while the IHRU has for many years been entangled in the inertia of the public administration.

These circumstances lead us to believe that the State will not make a decisive contribution to expanding supply on the necessary scale and with sufficient critical mass.

4th – The provision of public incentives to private parties in order to increase the desired supply

These consist mainly of tax reductions or exemptions for those who sell their properties to the State or transfer properties from local accommodation to long-term residential renting.

Article 71(31) of the Tax Benefits Statute

Gains arising from the sale for consideration, to the State, the Autonomous Regions or local authorities, of properties intended for housing purposes shall be exempt from personal income tax and corporate income tax (…).

Article 74-A

Transfer of local accommodation properties to the rental market

1 – Rental income arising from lease agreements for permanent residential purposes shall be exempt from personal income tax and corporate income tax, provided that the following conditions are cumulatively met:

a) They result from the transfer to rental, for permanent residential purposes, of properties allocated to the operation of local accommodation establishments;

b) The registration of the local accommodation establishment took place and the property remained allocated to that purpose until 31 December 2022;

c) The lease agreement is entered into and duly registered on the Tax Authority Portal by 31 December 2024.

2 – The exemption provided for in the preceding paragraph shall apply to rental income obtained until 31 December 2029.

These are time-limited exemptions whose benefit is insignificant. As the President states, the instrument “is unlikely to restore some of the confidence lost by private investors” (…) “without whom any comprehensive solution is insufficient”.

5th – Transitional measures, including restrictions on rent increases during the launch and consolidation period of the Programme

Although this measure is intended to curb increases in residential rents, as already happened this year in a departure from what is provided for in the New Urban Lease Regime, that will not be its only effect. The immediate effect will be the withdrawal of more properties from this market. If rent levels are not sufficiently attractive to landlords, they will act rationally and seek other investment alternatives in other markets. Restricting rent increases in an inflationary economic environment means that landlords will experience an effective reduction in the rents they receive and, as a result, will leave the market. They may even convert the properties to other uses.

If private parties are essential to a comprehensive solution to the housing crisis, why create rules that place further burdens on them rather than establishing mechanisms for cooperation and incentives to create more and better housing supply, in a virtuous cycle that benefits everyone?