LISBON, May 27 (Reuters) - Portugal's residential property market shows signs of overvaluation, with a potential correction posing a risk to financial stability, the Bank of Portugal said on Wednesday, as strong foreign demand and tight supply drive prices higher.

• It said in its quarterly financial stability report that house prices in Portugal rose 17.6% in 2025 after a 9.1% increase a year earlier, marking the fastest annual increase in the euro zone, where prices grew 5.2% on average.

• The central bank said "overvaluation models continue to signal that house prices remain above expected equilibrium levels."

• A tighter monetary policy, weaker economic conditions or abrupt global market shifts could trigger a correction in housing prices, potentially reducing collateral values and increasing credit risk.

• Foreign buyers accounted for 28% of property transactions in 2025, with Brazil, Angola and France among the main sources, and paid higher average prices than residents, it said.

• Portuguese households remain broadly financially sound, with still moderate debt levels and relatively high savings.

• However, their risk profile could deteriorate should debt servicing costs rise, it warned.