Is Portugal’s property market heading for a bubble?

Just when you thought Portugal’s property prices couldn’t go up any further, it has – the housing market saw the greatest increase EVER in September with growth of 22.8%, begging the question for how long can it go on?

In fact, September was the biggest jump in average across-the-board prices since at least 1988 when the Residential Real Estate Price Index from Confidencial Imobiliário began charting such data.

And for those estate agents out there who think there is no risk of a housing market bubble, there are clear indications that despite demand outstripping supply, that the market is now overheating.

Apart from record high prices, house prices continue to significantly outpace wage growth and there is a notable shortage of new house supply with experts from banks and international organisations warning that the market is becoming unsustainable, that homes are overvalued, with one recent analysis suggesting by as much as 35%.

And a new European Commission report published on Tuesday shows that house prices in Portugal are among the highest in Europe, with tourism and the crisis in the construction sector being the main factors.

House prices have risen dramatically across the European Union in the last ten years, and Portugal is on the list of countries where properties are most overvalued.

That’s according to a report from the European Commission, “Housing in the European Union: market developments, underlying factors and policies“, published on Tuesday.

Between 2014 and 2024, house prices in the EU increased by an average of 50%, “but in Hungary, Lithuania, Czechia, Portugal, Estonia, Bulgaria and Poland, nominal house price growth exceeded 200%,” the report said.

The reasons behind the current state of housing in the European Union include higher interest rates, demand for housing from wealthier families and investors, an increase in short-term rentals, and a lack of new construction.

“Prices are estimated to be overvalued by around 35% in Portugal, which is the only country where overvaluation increased significantly by 2024.”

There are several reasons for the inflated house prices in Portugal, and some factors are more prominent than others. According to the European Commission’s report, tourism and short-term rentals are among them.

“The increase in short-term rentals in tourist areas is closely related to the increase in house prices and rents,” the researchers concluded.

The rise of home-sharing platforms such as Airbnb has disrupted the traditional property market, as it has contributed to the decrease in supply of long-term rentals.

“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,” concluded the study.

Portugal is the EU country where tourism has had the “greatest impact on house prices”, said the report.

In Portugal, the proportion of public housing is one of the lowest in Europe. Residential properties owned, managed, or subsidised by the government or local authorities represent around 2% of the total stock, according to a recent study by the University Institute of Lisbon (ISCTE).

According to the European Commission’s report: “In some urban areas, part of the housing stock is owned by companies, and the long period of low interest rates has contributed to increased demand from institutional investors.”

The report states that institutional investors, such as insurance companies and pension funds, “have played an important role in the rise in property prices over the last decade, particularly in global capitals”. In Portugal, pension funds have “significant exposure”.