Europe’s Housing Market Hit by “Phantom Inflation” as Prices Overshoot Reality

In the narrow streets of Lisbon, “For Sale” signs no longer signal opportunity but rather a warning. A modest apartment can now cost more than what an entire family can afford, not because of genuine demand, but because Europe’s housing market has drifted sharply out of balance.

Portugal’s capital is only one example of a wider European housing crisis, where surging property prices are being driven by mass tourism, speculative investment, and chronic supply shortages rather than income growth or demographic need.

According to data compiled from the European Commission, Euronews, and the OECD, parts of Europe are experiencing what economists increasingly describe as “phantom inflation” in real estate, price growth disconnected from economic fundamentals.

Portugal at the Epicenter

Portugal currently tops the list of Europe’s most overvalued housing markets, with home prices estimated to be around 35% above their fair value.

Heavy tourism in Lisbon and Porto, coupled with the spread of short-term rentals on platforms such as Airbnb, has drained the long-term rental supply. Public housing accounts for just 2% of total housing stock, while construction permits can take up to 31 weeks to secure.

At the same time, a growing number of vacant properties and increased purchases by pension funds and insurance companies have tightened supply further, pushing prices to unsustainable levels.

Eastern Europe: Prices Outpace Incomes

In Hungary, home prices more than tripled between 2014 and 2024, fueled by years of low interest rates that encouraged speculation and reshaped Budapest’s rental market through tourism.

Lithuania has seen prices jump by over 200% in a decade, particularly in Vilnius, driven by strong demand and both domestic and foreign speculative investment.

A similar pattern has unfolded in Czechia, where Prague has become one of Europe’s most expensive capitals, with prices rising more than 200% over ten years, far outpacing wage growth.

Baltics and Balkans: Supply Constraints Bite

Estonia, especially Tallinn, has recorded sharp price increases amid slow construction and rising material and labor costs. Bulgaria has also seen prices surge by more than 200%, supported by strong foreign investment in Sofia and tourist regions.

In Poland, where prices have more than tripled over the past 20 years, cities such as Warsaw and Kraków face a widening gap between incomes and housing costs, driven by urbanization, internal migration, and a shortage of affordable housing.

Southern Europe: Tourism Drives the Market

In Spain, cities like Barcelona and Madrid remain under intense pressure, with restrictions on short-term rentals failing to curb price inflation.

Greece has seen rapid increases in Athens and the islands as tourism booms, while bureaucratic hurdles continue to slow new construction. In Croatia, coastal cities such as Dubrovnik are increasingly dominated by tourist housing at the expense of local residents.

Meanwhile, Malta and Cyprus combine steep price growth with high vacancy rates, reflecting limited land availability and strong foreign demand.

The Property Tax Paradox

Ironically, many of Europe’s most overheated housing markets are also those with the lowest reliance on property taxes.

Property tax revenue amounts to just 0.2% of GDP in Czechia and Estonia, followed by Lithuania at 0.3% and Slovakia at 0.4%. Rates rise modestly in Austria (0.5%), Slovenia (0.6%), Turkey, Latvia, and Hungary (0.7%), and Sweden (0.8%).

Germany collects 0.9% of GDP from property taxes, Ireland 1%, Poland 1.1%, Norway and the Netherlands 1.2%, Finland and Portugal 1.4%, and Denmark 1.7%.

By contrast, northwestern Europe relies far more heavily on real estate to fund public finances. Property taxes reach 2% of GDP in Iceland, 2.2% in Switzerland and Italy, 2.3% in Spain, 2.8% in Greece, 3.1% in Belgium, 3.5% in France and Luxembourg, and 3.7% in the United Kingdom.

The European Commission has warned that without faster construction, expanded public housing, stricter regulation of short-term rentals, and a rethink of property taxation, the housing gap will continue to widen.

If left unchecked, Europe’s real estate market risks transforming housing from a perceived safe haven into a major social and economic liability, deepening inequality and undermining long-term growth.