Is This the End of Europe’s Golden Visas?

The days of the “golden visa” by residential investment in the European Union are numbered.

The EU door isn’t completely shut yet… but it’s closing.

In February, Ireland and Portugal announced the end of their golden visa programs. Spain appears to be ending its program as well. And Greece has doubled the required investment amount to qualify for its golden visa.

What’s driving this pullback? And what options remain to those of us who just want a new life overseas?

Financial Crisis: Golden Visas to the Rescue

Golden visa programs in the EU emerged in response to a crisis that started in the U.S.

In the decade to 2006, U.S. banks issued trillions of dollars in residential mortgage loans. Housing debt grew from 46% of gross domestic product (GDP) in the 1990s to 73% by 2008, peaking at $10.5 trillion. With such a vast increase in money available to buy them, average U.S. house prices rose by more than 50% from 2000 to 2007. In many regional markets, prices more than doubled.

The behavior of the recently deregulated financial system made the U.S. housing boom—and subsequent bust—a global one.

Wall Street bought and bundled these mortgages—many classed as “subprime”—into mortgage-backed securities (MBS). They sliced MBS into “tranches,” bribed ratings agencies to label them AAA safe, and sold them to investors all over the planet.

Trillions of U.S. dollars’ worth of MBS ended up on the balance sheets of European pension funds, banks, and mortgage agencies. There they became collateral for cash borrowing by banks eager to lend into their own domestic housing markets.

When the U.S. housing bubble burst in the summer of 2007, Wall Street initially refused to write down the value of these MBS. By September 2008, market sentiment did it for them. Nobody wanted to buy MBS, or to lend against them as collateral. The global financial system froze up as banks refused to roll over loans to technically insolvent counterparties.

The sudden withdrawal of liquidity from housing markets in peripheral EU countries like Ireland, Portugal, and Greece led to a dramatic drop in property values. That put borrowers underwater, just like in the U.S. But for EU banks—who now held worthless MBS, owed trillions borrowed against them, and whose mortgage collateral value had collapsed—the crisis was existential.

Unlike the U.S., where the Fed stepped in to buy MBS from insolvent banks, EU central banks lacked the resources to intervene. And because they were part of the eurozone, these countries couldn’t devalue their currencies.

That forced their governments to get creative. Since they couldn’t goose the liability side of the bank’s balance sheets, as the U.S. had done, they chose to address the asset side—by boosting property values.

There obviously wasn’t enough money in the domestic economy to do that. So, the governments of Ireland, Portugal, and other countries decided to “internationalize” their housing markets by allowing foreigners to gain residence rights by investing a target amount in domestic property.

Golden Visas: Victims of Their Own Success

This worked spectacularly well. In Portugal, for example, property values have risen by over 75% since 2012. Increases in Ireland haven’t been quite that big, but still large. Other countries who used this approach included Malta, Cyprus, Montenegro, Latvia, Bulgaria, and Spain.

If your goal is to goose domestic property prices, then golden visas make perfect sense. But allowing foreigners to buy residence rights via property leads to two distortions.

Portugal is the best example. In many parts of the country, the “golden visa bid” became the floor price for homes. Sellers priced their properties with foreign wealth in mind. Modest apartments were suddenly listed as €500,000 dream homes.

That made residential property unaffordable to native Portuguese. Essentially, Portuguese buyers were competing with a global market they couldn’t possibly match.

The second problem is that because golden visa investors gain residence rights even if they don’t live in their properties, they either leave them empty or rent them out. That’s decreased the supply and increased the price of long-term rentals.

In Lisbon, short-term rentals now account for more than 60% of listed properties. Rents there increased by 37% in the fourth quarter of 2022 alone. It’s now the third costliest rental market in Europe after Milan and Paris.

But Portugal is one of the poorest countries in Western Europe. Half of Portuguese earn less than €1,000 a month. They’re effectively competing with deep-pocketed foreigners for living space—and that’s made them increasingly angry.

“European Values”

Late last year, European Commission President Ursula von der Leyen warned that the region’s values “are not for sale.” She was reflecting a widespread belief that golden visa programs turn European residence rights into a commodity.

It’s impossible to argue that point; that’s precisely what they do. But attitudes might be different if golden visas went primarily to people of European ancestry. That hasn’t been the case.

Ninety-one percent of Irish golden visas went to Chinese nationals. For the first four years of the Portuguese program, Chinese accounted for between 65% and 85% of applicants. Chinese numbers fell during that country’s zero COVID policy, but jumped again recently.

Given European sensitivities about migration from Africa and the Middle East, concern about Chinese immigration is understandable. And golden visa programs in Malta, Cyprus, and other countries made things worse by facilitating money laundering and accepting individuals with political and even criminal issues.

Given this background, it was perhaps only a matter of time before Ireland and Portugal decided to end their programs.

And Now for Some Good News

I suspect one reason Portugal decided to close the residential property route to residence is the looming prospect of mass American applications.

According to a recent report by Henley & Partners, American applications for golden visas and passports jumped 447% between 2019 and the first quarter of this year. In 2022, Americans received one in every five golden visas.

I’m not surprised. More and more Americans tell me they’re deeply concerned about the country’s direction and stability. A poll from last summer found that almost half of U.S. respondents didn’t feel they had a good chance of improving their standard of living, while 86% agreed that Americans are greatly divided on values.

In other words, Americans are increasingly motivated by the same considerations that lead citizens of other unstable countries to try to get into the EU.

But there’s a big difference… and it will be decisive to the future of the golden visa.

Most potential American emigrants want to live in places like Portugal, Greece, and Spain. (Sure, some just want to invest in property, but they don’t need a golden visa to do that. There are other ways.) The freedom to travel the EU freely is a bonus, but they aren’t looking for a backdoor to setting up shop in Berlin or Paris. They’re after the lifestyle.

The Portuguese Prime Minister, Antonio Costa, has said that in future, the main route to Portuguese immigration and residence would be via programs that cater to people who intend to reside in the country. The “digital nomad” visa—announced in October last year—will continue. So will another visa for business investors.

On top of that, depending on the outcome of internal discussions currently underway, the golden visa may still be available to those who invest in renovating run-down properties, in cultural activities, and in approved investment funds.

In other words, if you intend to buy property in Portugal, live in it, and survive on earnings from, say, U.S. investments, Social Security, or other non-Portuguese sources, you’re perfectly welcome to the country. Ditto if you plan to invest in nonresidential assets. After five years and with basic Portuguese language skills, you can become a citizen.

The problem with the existing golden visa approach isn’t necessarily that it crowds the streets of Lisbon or the Algarve with foreigners. It’s that it distorts property market incentives and encourages foreigners with ulterior motives to lock up valuable property for no reason other than to get to some other part of the EU.

Once the golden visa system had accomplished its primary goal of rescuing local banks from collapse, the cost of those distortions outweighed the benefits.

By contrast, Americans who plan to live in Portugal (or other EU countries with similar visas) as “digital nomads” or retirees will bring money into the economy and pay VAT and property taxes. In other words, they’ll contribute to the economic and cultural life of the country in positive ways.

That’s an entirely different kettle of fish to the residential property route. Given declining birth-rates, expanding the economic life of the country through “real” immigrants with income that will be spent locally is a priority.

That’s why I firmly believe that all is not lost… especially for Americans.

The Future of Global Diversification

There’s no doubt we live in a rapidly changing world.

The financial crisis of 2007-2008 showed that the Western economic system is increasingly a house of cards. The average U.S. household only managed to maintain its living standards by borrowing. The money they borrowed was accumulated by a financial system that relies more on flows of interest and monopolistic pricing power than on innovation and economic prowess. The same was true of most of Europe.

The U.S. electoral cycles from 2008 onward have revealed a bitterly divided society. The COVID pandemic showed that we can’t come together even to confront an existential crisis.

But the biggest change is a rapid retreat from globalization and openness. COVID, an aggressive China, and the Russian invasion of Ukraine have led countries and regions to look inward.

Time will tell what sort of world the mid-21st century will see. But I’m certain of one thing: there is still enough openness for forward-thinking Americans to gain a foothold abroad. The doors aren’t completely shut.

But time is of the essence, as they say. If you hope to diversify yourself globally, now is the time to start the process.