Houses in Portugal are overvalued by 35%, warns European Commission

Portugal tops the list of European countries with the most overvalued housing prices, according to a new report by the European Commission that analyses the Eurozone property market in detail. “Based on the latest available data, the Commission estimates that the average overvaluation is most significant in Portugal”, reads the document published on Tuesday.

According to the EU executive’s calculations, “prices are estimated to be overvalued by around 35% in Portugal, which is the only country where overvaluation is estimated to have increased significantly in 2024”, which contrasts with the easing trend observed in most European countries, write Guillaume Cousin, Christine Frayne, Vítor Martins Dias and Bořek Vašíček, authors of the study ‘Housing in the European Union: Market Developments, Underlying Drivers, and Policies’.

The analysis carried out by the researchers for the European Commission confirms what many Portuguese families already feel in their daily lives: housing has become dramatically less affordable. Between 2014 and 2024, Portugal recorded nominal growth in housing prices of over 200%, placing it among the countries with the most pronounced increases, alongside Hungary, Lithuania, the Czech Republic, Estonia, Bulgaria and Poland.

Even more revealing is the fact that, adjusted for inflation, between 2014 and 2024, real house prices rose by more than 50%, well above the European average of 25%. However, it is important to remember that in 2014 the domestic market (like many European markets) was still suffering from the 2008 financial crisis and the intervention of the troika, which makes the starting point the lowest in the last decade.

Brussels calculates the overvaluation or undervaluation of house prices using an average of three different metrics that compare observed market prices with values that would be justified by economic fundamentals:

1. The first metric is based on econometric models that relate house prices to fundamental variables such as household income, interest rates and housing availability;
2. The second metric is the price-to-income ratio, which divides the median price of houses by the median household income, showing how many years of income would be needed to buy a house;
3. The third metric is the price-to-rent ratio, which compares the purchase price of a property with the value of the annual rent that property could generate.

Pressuring house prices in Portugal is, first and foremost, a housing supply that is below the pressure of demand, with the authors of the report emphasising that “constrained supply has become a structural feature of housing markets in many countries, resulting in part from regulations covering a range of factors”. Portugal dramatically exemplifies this reality, with the document emphasising that “new construction has been declining, reaching historic lows”.

This situation is the result of multiple structural constraints, according to the researchers. “Stricter building regulations and a general decline in productivity in the construction sector” are identified as the main reasons. The report specifies that “the predominance of small companies in the construction sector makes it difficult to overcome the productivity challenge” in an industry that has the worst productivity performance in the entire European economy.

The study also highlights that Portugal faces particularly long licence processing times, which can take up to 31 weeks for permits to be issued, one of the longest times in the European Union. This complex bureaucratic process, involving multiple public and private actors, represents a significant source of inefficiency that drastically limits supply response.

At the same time, the report identifies zoning and land use restrictions as fundamental constraints on the availability of land for housing construction. These regulations, while serving important environmental objectives, determine the possible uses of available land and, when overly restrictive, severely limit the expansion of housing supply.

Unparalleled tourism impact in Europe

Investors also note that although residential investment has returned to pre-2008 levels, this has not translated into substantially higher new housing construction. Instead, resources have been directed towards renovations, including energy efficiency improvements, at a time when the sector faces widespread labour shortages and skills mismatches.

Given this reality, Guillaume Cousin, Christine Frayne, Vítor Martins Dias and Bořek Vašíček point out that “Portugal is the European Union country where tourism has had the strongest impact on housing prices”. The analysis specifies that “the expansion of home-sharing platforms has disrupted the traditional housing market, blurring the lines between short- and long-term rentals”.

This dynamic “has contributed to a contraction in supply in the long-term rental market, as traditional providers of long-term housing reallocate their properties to the short-term market for higher profits”, the report reads.

The data presented also shows that the elasticity of housing supply in Portugal is among the lowest in Europe. This means that there is little market responsiveness. In practice, when house prices rise, this does not automatically result in a large number of new houses being built to balance the market — supply reacts very little to price changes.

This causes prices to continue to rise because the number of homes available cannot keep up with growing demand. This “dynamic exacerbates scarcity and amplifies price increases, particularly in regions with limited supply”, the researchers explain.

The figures in the European Commission report also indicate that Portugal is among the countries where the ratio between house prices and household income is 20% higher than a decade ago. This deterioration in housing affordability places Portugal alongside the Netherlands, Hungary, Luxembourg, Ireland, the Czech Republic and Austria as the territories where buying a home has become proportionally more difficult over the last decade.

For households that need to resort to mortgage credit, the situation is even more serious because, unlike in countries such as Bulgaria, Romania, Croatia, the Czech Republic and Hungary, where rising incomes have led to an increase in households’ financing capacity, in Portugal (as well as in Estonia, Luxembourg, France, Slovakia and Cyprus), borrowing capacity has decreased.

This pressure is also visible in the rental market, with Lisbon standing out among European capitals with the highest financial effort on the part of households to rent a two-bedroom flat in prime areas. According to researchers, rents for two-bedroom properties in these areas amount to more than 80% of tenants’ income. Only in Budapest, Hungary, is the financial burden on tenants higher.

Even in Paris, one of the most expensive European cities to buy and rent a home, despite rents being around 20% higher than in Lisbon, the financial effort that the French make to rent a two-bedroom flat in a prime area of Paris is much lower than that of the Portuguese in Lisbon, with rents standing at around 60% of their income.

For Portugal, the data presented in this European Commission-approved study confirms a reality that transcends political cycles: the country faces one of the most severe housing affordability crises in Europe, requiring a coordinated and structural response that goes far beyond the measures traditionally implemented.