Lisbon – Portugal is experiencing a significant surge in the cost of building new homes, placing it among the countries with the highest increases in the European Union. The rising expenses, driven primarily by labor costs, are exacerbating an already challenging housing market and raising concerns about affordability for prospective homeowners. This trend comes as demand remains high, fueled in part by the country’s economic recovery and the influx of investment through programs like the Recovery and Resilience Plan (PRR).
Data released by Eurostat shows that Portugal recorded a 4% increase in construction costs for new housing in the past year, placing it fourth highest among the 16 EU member states with available data. This increase mirrors the growth seen in Lithuania (4%), trailing only Bulgaria (+11.8%), Romania (6.9%), and Slovenia (4.4%). The last time Portugal experienced a similar level of cost escalation was in 2020, during the initial phase of the COVID-19 pandemic. The Eurostat data does not currently include figures for Belgium, Ireland, France, Croatia, Luxembourg, Poland, and Slovakia.
Shifting Costs: From Materials to Labor
While the cost of building materials saw a modest increase of 1% in January, the primary driver of the current price hikes is the escalating cost of labor. According to the Instituto Nacional de Estatística (INE), labor costs have risen from around 5% before the war in Ukraine to approximately 8% in 2024 and 2025. In January, the annual variation in labor costs reached 7.7%. This shift reflects a growing shortage of skilled construction workers, coupled with increased demand as construction projects accelerate, particularly those funded by the PRR.
The demand for residential properties continues to outstrip supply, further contributing to price increases. In 2023, house prices in Portugal rose by 17.6%, the largest annual increase since at least 2010. Lisbon has been particularly affected, with the average price per square meter exceeding €5,000 for the first time. The situation is further complicated by recent events, including the devastating storms that impacted the central region of the country and the ongoing geopolitical instability in the Middle East, particularly the conflict in Iran, which are expected to add further pressure on costs and supply chains.
A Recent History of Volatility
The current increase, while significant, is less dramatic than the peak experienced in early 2023, when construction costs soared by 12.3%. This earlier surge was initially triggered by disruptions to global supply chains during the pandemic and subsequently exacerbated by Russia’s invasion of Ukraine, which led to a sharp rise in energy prices. At that time, material costs increased by 16% by the end of 2022.
Following 2023, costs began to stabilize, but a new, albeit more gradual, upward trend emerged in October 2024. Outside of the period directly following the invasion of Ukraine, this recent increase is the most substantial seen since the global financial crisis of 2009, highlighting the persistent challenges facing the construction sector.
Impact on Affordability and Future Outlook
The escalating costs are not merely statistical figures; they have a tangible impact on the ability of Portuguese citizens to access affordable housing. The combination of rising construction costs, high demand, and limited supply is creating a challenging environment for both potential buyers and renters. The situation is particularly acute in major urban centers like Lisbon and Porto, where property prices have risen significantly in recent years.
Looking ahead, the situation is unlikely to improve dramatically in the short term. The ongoing conflict in Iran, with its potential to disrupt global energy markets and supply chains, represents a new source of uncertainty. The recovery efforts following the recent storms in central Portugal will likely place additional strain on resources and labor availability. The INE is expected to release updated data on construction costs in the coming months, providing a clearer picture of the evolving situation. Stakeholders are closely watching for government interventions aimed at mitigating the crisis and promoting affordable housing solutions.
The Portuguese government has implemented several measures to address the housing crisis, including incentives for construction and rental properties, and programs to support first-time homebuyers. However, the effectiveness of these measures remains to be seen. The long-term solution will likely require a multifaceted approach that addresses both supply-side constraints and demand-side pressures.
As Portugal navigates these challenges, the focus will remain on finding sustainable solutions to ensure that access to adequate and affordable housing remains a reality for all citizens. The next key data release from the INE, scheduled for [date to be confirmed], will provide further insight into the trajectory of construction costs and the overall health of the housing market.
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