The apparent paradox

Recent news reports have cited studies showing that housing prices rise more sharply in areas with greater increases in construction. At first glance, this seems like an economic paradox: if supply increases, prices should fall. This apparent contradiction is the starting point for what must be a deeper analysis of what truly drives the housing market in Portugal. The explanation, far from being mysterious, lies in a very simple yet powerful economic force: demand. And right now, demand is a tide that lifts all boats, even those still in the shipyard.

The myth of “excess” construction

It is tempting to look at a neighborhood full of cranes and conclude that soaring prices are caused by an uncontrollable building boom. However, this perspective ignores the broader context. The truth is that Portugal has emerged from a decade of chronic underinvestment in new construction. Saying that construction increased by 95% in a year may be accurate, but it is misleading. The accumulated housing deficit is enormous, resulting from a perfect storm of the 2008 financial crisis, tight and inconsistent regulation, and lack of financing.

What we see today is not “excess,” but rather the resumption of a necessary activity after years of construction drought. The areas with the most building activity are precisely those showing the greatest economic dynamism, more employment, better infrastructure, and consequently, stronger population attraction. Construction is not causing prices to rise; it is responding to the market. The problem is that no matter how vigorous it seems, the response is chasing a train that keeps accelerating: demand.

Demand: a giant with a big appetite

Demand is composed of several forces that together create unsustainable pressure on the market.

Domestic demand is stronger. Generations of Portuguese postponed leaving their parents’ homes or buying their first house. Now, with a somewhat more stable job market (despite low wages), this repressed demand is being unleashed.

Although less intense than in previous years, tourism and short-term rental platforms continue to exert pressure. The success of tourism has converted thousands of homes into short-term units, removing them from the long-term rental and sales market. This absorbed part of the supply, especially in urban centers.

Real estate also remains, for all intents and purposes, a safe investment. In a context of global uncertainty and low interest rates (until recently), real estate has stayed a secure refuge for savings, both for Portuguese and foreign investors. Although most investment properties end up as rental supply, the volatility and inconsistency of tax and rental policies have increasingly discouraged investors from placing more properties on the market for that purpose.

The Non-Habitual Resident and Golden Visa programs, though revised, attracted a significant influx of investors and retirees with high purchasing power, segmenting a portion of the market into a higher price range.

When we combine these factors, it becomes clear why construction, even at a faster pace, cannot cool down prices. Demand is growing at an even more dizzying rate. The areas that appreciate the most are those in highest demand, and it is only natural that both national and international investors concentrate their construction efforts there. The “blame” does not lie in investment itself – which is essential – but in the colossal imbalance between available supply and total demand.

Solutions beyond “build, build, build”

If we simply build more of the same, we risk creating cities of luxury enclaves beside deserts of affordability. The solution must be multifaceted and intelligent; it must include recovering the existing housing stock. Portugal’s housing inventory is ageing, and thousands of vacant buildings lie in the hearts of cities. There is an urgent need to create strong governmental incentives and simplify bureaucratic processes for their rehabilitation. Rehabilitating is often faster, more sustainable, and less expensive than building from scratch, while also revitalizing the urban fabric.

The solution must also involve diversifying supply through policies such as the 1/3+1/3+1/3 model: the market cannot serve only the luxury segment. Public policy should promote construction for all income levels. An interesting approach could be to apply the 1/3+1/3+1/3 model to new medium- and large-scale developments, with incentives for one-third of the area to be allocated to affordable housing (with controlled prices), one-third to mid-market prices, and one-third to the upper segment. This would prevent social segregation and ensure that growth benefits everyone.

Last but not least, the solution to the housing problem also lies in mobility and urban planning. The major challenge is to make it possible to live conveniently within 30 minutes of one’s workplace through an efficient public transport network, even when living in the outskirts (which is currently not the case, even for those living and working in city centers like Lisbon or Porto). This requires massive investment in efficient, fast, and frequent public transport – more metro lines, more trains, more dedicated bus lanes. If mobility is excellent, the “periphery” ceases to be peripheral, and the range of affordable housing options expands dramatically.

From cement to connections

The debate cannot remain focused on the false dichotomy between “building a lot” and “building a little.” The core issue is for whom and where we build, and how new housing integrates into a functional and inclusive urban ecosystem.

The inconvenient truth is that no matter how much we build, if demand continues to be fueled by disproportionate external factors and we fail to make life easier for those choosing to live outside the most expensive epicenters, prices will keep rising. The solution lies in a coordinated strategy – to recover what we already have, diversify what we build, and, above all, connect efficiently the places where we live. Only then will we be able to turn cement into truly livable communities.

Rute Xavier, Professor at CATÓLICA-LISBON