The cost of homes in Lisbon rose 5.8% in November to a record €5,426 ($5,963) per square meter, according to data from Idealista. That’s the second-biggest increase in Europe after Athens, the hottest property market among major European cities tracked by Bloomberg.

After an almost 30% increase over the past five years, residential property in Portugal’s capital is pricier than Milan, Madrid and Berlin. That puts a new home out of reach for most locals in Lisbon and shows how supply often outweighs interest rates in setting prices. 

Portugal’s government has started to change course, ending the country’s golden visa program and approving a plan to cut tax incentives for new residents. But with its sunny climate and prices about half as much as in Paris and Zurich, the efforts to rein in demand are having little impact. 

“Despite these changes, we’ve seen an increase in the number of inquiries from our foreign clients,” said Paulo Silva, head of real estate consultant Savills in Portugal. “There simply aren’t enough homes to fulfill demand, even as sales have slowed.”

While the end of the cheap-money era hit buying power across Europe, a lack of supply is impacting prices in many cities. Six out of the ten markets monitored by the Bloomberg City Tracker are rising. 

Athens is seeing year-on-year gains close to 12%, Stockholm is rising over 5% — posting six straight months of growth — while prices in Madrid and Milan are still rising steadily at a pace of over 3%. Paris had the weakest performance, posting a drop of more than 6%. 

To capture the latest housing-market trends in European cities, Bloomberg compiles figures from a range of providers. Some are asking rates and indicative levels, while others are official figures on transactions. 

Once a real estate backwater dotted with aging buildings, Lisbon became a hot spot for investment after completing an international bailout in 2014. At the time, the government had scrapped rent controls and introduced the golden visa — a pathway to residency in exchange for a €500,000 property investment — along with tax breaks to lure new residents.

Soon thereafter, thousands of overseas buyers descended upon Lisbon looking for bargains as the country recovered from the financial crisis. Among them was Swiss billionaire Claude Berda, the founder of French broadcaster AB Groupe. In 2016, he partnered with local investor Jose Cardoso Botelho to buy their first plot of land on one of Lisbon’s seven hills.

“We were taking a selfie with the river Tagus behind us when we noticed a small billboard that read: ‘for sale,’” said Cardoso Botelho. “We shook hands and that’s how it all started.”

The two set up Lisbon-based Vanguard Properties and have since developed almost a dozen residential buildings in the city of half a million people. Demand was so strong that they often sold out before they were built. 

Cardoso Botelho says long waits for construction licenses — eight years for one of his lots — has caused the severe shortage. The red tape means Vanguard has no units to sell next year after handing over 500 apartments over the past two months — almost half went to foreign buyers. 

In 2022, the number of homes available in Portugal reached the lowest level in 15 years, according to Confidencial Imobiliario, which collects data on the property market. Social housing accounts for just 2% of the total stock — one of the lowest in the EU. 

Meanwhile, the average price of a new home in Lisbon has overtaken Dublin and Brussels, according to Deloitte’s 2022 Property Index. For many Portuguese families, whose salaries are among the lowest in western Europe, the dream of buying a home has been replaced by expensive, substandard rentals in far-flung suburbs.

Lisbon’s trends show how hard it is for governments to manage housing prices. While demand can be stoked with incentives, supporting supply takes time and money, and getting the balance wrong risks boom-and-bust cycles. 

Concerns are mounting that today’s rising prices could soon turn. Portugal’s central bank last month said lenders would have to build additional capital buffers to cover for possible housing-related losses. The move took place after residential sales in Portugal fell 22% in the first six months of the year, according to real estate services provider Jones Lang LaSalle.

With home ownership out of reach and rents soaring, more Portuguese people are living in precarious conditions. At Quinta dos Ingleses — a small forest area on the outskirts of Lisbon — about 40 tents have been set up. 

“Every day, new people show up,” said Filipe Silva, who coordinates a program for homeless people at a community center in the Carcavelos parish near Lisbon. “These are mostly people who work, but are unable to pay for housing.”

The plot sits next to the elite Nova School of Business and Economics and an English school, where tuition fees can surpass €1,000 a month. The growing inequality has sparked tensions, with thousands taking to the streets earlier this year to protest the housing crisis in Lisbon and other Portuguese cities — echoing frustrations elsewhere.

Portugal’s Socialist government has responded by pledging to increase the number of affordable homes and end incentives for foreigners. Outgoing Prime Minister Antonio Costa says these programs were fueling real estate speculation. But taking Portugal off the market might not be so easy.

“At the end of the day, the country’s warm climate, stunning beaches, lifestyle and relatively low cost of living will continue to draw the interest of foreign investors,” said Pedro Coelho, chief executive officer of real estate investment firm Square Asset Management.