The state of the European housing market: rental growth, high % rates and lack of supply

The rising cost of housing across the European Union is making it unaffordable for renters, discouraging potential buyers and discouraging the construction of new homes. Along with Europe's growing housing crisis, homelessness rates across the bloc are also rising. What solutions exist for Europe's housing crisis?

September is always an active time for the rental market in Paris.

As students return to the city after summer vacations, demand for more affordable housing increases. However, renters looking for a cheap room or studio in 2023 face an even bigger challenge than before. Paris has become the second most expensive city in the European Union for renters (€28.50 per square meter per month), behind only Dublin, according to Deloitte's annual survey released in August.

In cities across Europe, rising rents combined with rising energy and food costs are forcing people to adapt to housing, especially young people.

More than a quarter of Europeans aged 15 to 29 reported living in overcrowded conditions in 2022. In Ireland, 30% of young people aged 18 to 24 are still living with their parents, which represents a nearly 10% increase in five years.

It's not just young renters in Europe who are struggling, however. As rents in Paris, Berlin and Lisbon hit record highs, mortgage interest rates have also risen across the union, driving up housing costs for variable-rate homeowners and discouraging many potential buyers altogether.

In Paris, real estate sales fell 23% in the second trimester of 2023.

The large number of people wanting to buy a home but finding themselves unable to due to high interest rates are now putting additional pressure on the tight rental market. As Ruth Owen, deputy director of FEANTSA, the European federation of national organizations working with the homeless in Brussels, pointed out, the crisis has built up over decades. "There is a fundamental structural problem: housing costs are rising faster than incomes, and this trend has intensified in many places," Owen said.

In the decade to 2022, average rents in the European Union rose by 19% and house prices by 47%, according to Housing Europe, an organization of groups providing public, cooperative and social housing in the EU. There have been many external shocks in recent years: Covid-19, the European energy crisis caused by the war in Ukraine, and the global cost of living crisis have all contributed to worsening conditions in the housing market.

The supply problem is also acute.

The European Central Bank raised its key interest rate to a record 4 percent in mid-September and interest rates will remain high "for as long as it takes" to tackle inflation, ECB President Christine Lagarde said later this month. Housing construction across the eurozone has slowed to its lowest level since April 2020 due to high construction costs and supply issues caused by the Covid-19 pandemic and a Russian full-scale invasion of Ukraine in 2022. The problem is particularly acute in Germany, where new housing construction is expected to fall by 32% between 2023 and 2025, according to a 2023 report from the IFO research institute in Munich.

There are also problems with existing housing. "In Europe, we have an outdated and inefficient housing stock," said Angela Baldellou, director of Observatorio CSCAE, a Spanish housing NGO.

Solving the problem requires "finding a balance between sustainability goals and the need for more housing, affordability and viability of place," said Diana Jordanova, director of communications at Housing Europe.

Worst case scenario, a shortage of good quality and affordable housing could further drive up prices and worsen affordability for those least able to afford housing. However, confidence in the market is low. Real estate was the most challenging sector in Europe in 2023, suffering from high levels of financial uncertainty, volatility and increased perceived risk, according to a study by global legal advisory firm Weil, Gotshal & Manges.

Avoiding crisis swings that shake up the market may require a change in approach in some countries and cities, Yordanova said. "In many countries, housing is seen as an asset and is often used for speculation or investment. If we look at some of the most successful housing systems in Europe, there is constant investment in public housing so that the most vulnerable people are not left on the side of the road in times of crisis. "

The figures show that this is not happening across the continent. "Almost 900,000 people sleep on the street or are in homeless facilities every night in the EU," Owen said. According to FEANTSA, the number of homeless people in the EU has increased by 30% since 2019. However, there are also European success stories. In the Austrian capital Vienna, the city is investing around 500 million euros in housing construction and renovation, as well as financial support for low-income families. Almost 60% of the population lives in municipal or public housing.

Finland also offers another example of how long-term public policy can successfully reduce homelessness. The Finnish model works on the principle of "housing first", recognizing housing as a basic human right, which, once granted, serves as the basis for other issues.

Owen believes that similar initiatives are possible across the EU. "The first step in dealing with the situation in the European Union is political commitment," she said.