Portugal’s Housing Crisis: Prices Overvalued by 35%, Report Says

House prices in Portugal are among the highest in Europe, according to a new report from the European Commission. Published on October 3, 2023, the report highlights that various factors, including tourism and a crisis in the construction sector, are driving these inflated prices. The findings indicate that properties in Portugal are overvalued by approximately 35%, a significant increase compared to previous years.

The report, titled “Housing in the European Union: market developments, underlying factors and policies,” reveals that house prices in the European Union have surged by an average of 50% from 2014 to 2024. In several countries, including Portugal, Hungary, and Lithuania, the increase has exceeded 200%. The analysis points to several underlying causes for this surge, including rising interest rates, the demand from affluent buyers and investors, a boom in short-term rentals, and a notable shortage of new construction.

According to the report, “Prices are estimated to be overvalued by around 35% in Portugal, which is the only country where overvaluation increased significantly by 2024.” This highlights the concerning trend within the Portuguese housing market, where property values have diverged from their actual worth.

Tourism and Short-Term Rentals Fuel Price Inflation

The impact of tourism and short-term rentals on Portugal’s housing market is profound. The European Commission’s findings underscore that the rise in short-term rentals, particularly in tourist hotspots, directly correlates with escalating house prices and rents. The emergence of home-sharing platforms like Airbnb has disrupted traditional rental markets, decreasing the availability of long-term rental properties.

The report states, “There is growing empirical evidence to suggest that the increase in tourism in general and the rise of home-sharing platforms in particular have contributed to an increase in rents and house prices in some prime locations, such as historic city centres.” Portugal is identified as the EU country where tourism has exerted the most significant influence on property prices, a challenge also faced by other nations such as Spain, especially in cities like Barcelona.

Institutional Investment and Bureaucratic Challenges

Portugal’s public housing stock is among the lowest in Europe, with just around 2% of residential properties owned, managed, or subsidised by the government or local authorities, according to a recent study by the University Institute of Lisbon (ISCTE). The European Commission’s report notes that in urban areas, much of the housing is held by private companies, with institutional investors like pension funds contributing to rising property prices.

The report highlights that “the long period of low interest rates has contributed to increased demand from institutional investors.” It mentions that pension funds have significant exposure in Portugal’s property market. However, the challenges surrounding the issuance of building permits are stifling the necessary increase in public housing. The report points out that in countries including Portugal, Croatia, Spain, and Greece, “building licences are close to historic lows,” exacerbating the housing crisis.

The bureaucratic process for obtaining building permits is lengthy, with Portugal averaging 31 weeks for license issuance, compared to as little as 3 weeks in countries like Lithuania. The report suggests that simplifying documentation requirements could enhance efficiency in the construction sector.

Addressing the Housing Crisis

The issue of vacant properties further complicates Portugal’s housing landscape. The report indicates that approximately one in six properties across Europe is estimated to be vacant, with Portugal ranking among the countries with the highest number of unoccupied properties alongside Bulgaria, Romania, and Hungary.

Housing has become a central theme in Portuguese politics, leading to public discontent and protests over rising rents and insufficient affordable housing options. Proposed measures to address the crisis include implementing a new tax incentive for construction projects, which has long been advocated by industry stakeholders. The value-added tax (VAT) for construction projects up to €648,000 will be reduced to 6%.

This 6% VAT rate will also apply to rental properties not exceeding €2,300, focusing on areas with high demand such as Lisbon and Porto. Prime Minister Luís Montenegro explained that the rental limit was established based on “areas of greater pressure,” reflecting the reality of rising living costs in these urban centres.

While these tax-related measures await parliamentary approval, they aim to alleviate some of the burdens on the housing sector. In June, the European Commission voiced concerns about the effectiveness of the Portuguese government’s response to the housing crisis, advocating for concrete measures such as rent controls and restrictions on certain rentals.

The ongoing challenges in the housing market raise pressing questions about the future of affordable housing in Portugal and the broader implications for the European Union.