“Factors such as supply-demand dynamics, lack of new construction, and increased foreign interest shall persist in the short to medium term and keep an upward pressure on prices,” said a report by senior credit analyst Andre Soutinho and other DBRS researchers.

Portugal became a hot spot for foreign buyers more than a decade ago after the nation introduced “golden visas” which tied residency permits to investment in the country, including real estate purchases. The real estate option was removed in 2023 as a means of accessing golden visas, but that hasn’t deterred overseas buyers. 

Wealthy Americans have flocked to Portugal in recent years in search of sunny climes and a lower cost of living. These buyers accounted for about a third of all sales of Knight Frank’s Portuguese unit since the start of the year, according to Chief Operating Officer Jorge Costa. 

While the red-hot market has been a boon for existing homeowners, it’s also created a challenge for locals and first-time home buyers in Portugal, said DBRS. Prime residential property prices in Lisbon, the Portuguese capital, are now higher than in Madrid, Berlin and Amsterdam, according to a Savills Plc. report from February that tracks prime residential property in international cities.

To address the lack of affordable housing, Portugal’s outgoing government vowed to add 59,000 new homes. It also recently announced that the state would guarantee home purchase loans for borrowers between 18 and 35.

Developers in Portugal have said that it will take time to close the gap between supply and demand and that rising construction costs will make it hard to bring down property prices.

“Governmental measures to address these imbalances in our view are relatively limited as they require time to have an effect,” the credit rating agency DBRS said.

Social housing accounts for just 2% of the total housing stock in Portugal — among the lowest levels in the EU.