Europe faced with surging housing prices and declining affordability

Across the EU, housing markets are experiencing unprecedented shifts, characterized by rapidly rising prices, declining affordability, and a complex interplay of underlying drivers and policy challenges.

EU housing report

A recent report by the European Commission, "Housing in the European Union: Market Developments, Underlying Drivers, and Policies," sheds light on these critical trends, highlighting particular concerns in countries like Portugal, where the crisis is particularly acute.
Over the past decade, house prices in the EU have surged, outpacing income growth and significantly eroding purchase affordability. From 2014 to 2024, the average increase across the EU was 50%. However, in several countries, including Hungary, Lithuania, Czechia, Estonia, Bulgaria, Poland, and notably Portugal, this growth has been staggering, exceeding 200%. This dramatic rise, coupled with recent increases in mortgage rates, has made homeownership an increasingly distant dream for many.
While rents for existing contracts have seen more modest growth, rents for new contracts have skyrocketed, creating a severe rental affordability crisis for newcomers to the market.
The report identifies a confluence of factors fuelling this housing crunch, including demand-side pressures and supply-side constraints.
On the demand side, fundamental economic factors, coupled with evolving population structures, consistently drive housing demand. The ongoing trend of people moving to urban centres and international migration further intensifies demand in key areas. Shifts in household composition can alter the types and quantities of housing needed.
A long period of low interest rates has attracted institutional investors, such as insurance companies and pension funds, who have played a significant role in driving up property prices, particularly in global capitals. Portugal, for instance, shows significant exposure to pension fund investments in housing. The proliferation of platforms like Airbnb has dramatically reshaped the market, reducing the supply of long-term rentals and directly contributing to price and rent increases, especially in tourist hotspots and historic city centres.
On the supply side, complex and lengthy bureaucratic processes for issuing building permits significantly hinder new construction. In countries like Portugal, Croatia, Spain, and Greece, permit issuance is at historically low levels, with Portugal facing an exceptionally long average waiting period of 31 weeks. Increasing construction and land costs make new housing development more expensive. Additionally, construction sector inefficiencies and labour shortages further impede the pace and volume of new housing supply.
Paradoxically, a substantial number of properties across Europe lie vacant – an estimated one in six. Portugal, along with Bulgaria, Romania, Malta, Cyprus, and Hungary, has one of the highest shares of vacant properties, further constraining available housing stock.
Portugal stands out as a country where the housing crisis is particularly acute. The European Commission's report estimates that real estate in Portugal is overvalued by approximately 35%, making it the only country where this percentage has increased further by 2024. Portugal's predicament is largely attributed to tourism and short-term rentals, low public housing stock (only 2%), and bureaucracy and permitting delays.
The European Commission suggests that addressing the EU's housing crisis requires a multifaceted approach. These include streamlining building permit processes, adjustments in tax systems, balanced rental regulation, and increased investment in social and affordable housing.