Are you a 30-something professional looking to settle down and buy your first home in a friendly, welcoming European city?
Think again.
Rising real estate prices have turned home ownership into an increasingly unachievable dream for many Europeans — an issue compounded by the cost-of-living crisis, which has hit city residents and poorer households especially hard.
“The increase in housing prices is tremendous, and it’s even more severe in cities, especially large cities,” said Lamia Kamal-Chaoui, director of the OECD’s Centre for Entrepreneurship, SMEs, Regions and Cities. “And it’s no longer just impacting the poor, but also the middle class.”
House prices and rents have increase steadily since 2014, even during the COVID-19 pandemic, when — unlike previous economic downturns — the demand for housing surged, as extended lockdowns and the rise in teleworking kept people confined to their homes.
Right as the economy began to recover in 2022, Russia’s invasion of Ukraine brought a fresh array of budget headaches for governments — and a major cost-of-living crisis for households. Not only is housing more expensive, but it’s also increasingly harder to afford quality housing; many Europeans last winter faced mortgage and rent arrears or struggled to keep their houses warm.
According to Eurofound, younger residents are being hit hardest by the real estate crisis. Young Europeans live with their parents longer, are likelier to rent rather than own, and are often discouraged from seeking better jobs in areas with more opportunities because they can’t afford to live there.
This is a “major concern” for cities that “need young people to remain competitive,” said the OECD’s Kamal-Chaoui, who noted that “if [they] are not able to afford an apartment, they will never move to a city, no matter how attractive it is,” she said.
Real estate bubbles are so early 2000s
Despite concerns that rising housing prices might signal a real estate bubble, early signs indicate we are safe (for now).
In response to the cost-of-living crisis, central banks worldwide have hiked interest rates — a move that reversed a decade-long trend of housing price hikes in 2022, according to Swiss bank UBS. Its 2023 edition of the Global Real Estate Bubble Index identified only two of the 25 cities monitored — Zurich and Tokyo — as at risk of a bubble.
This might be a glimmer of hope for the housing market at large, but it’s bad news for prospective homeowners, as interest rate hikes mean steeper mortgages.
What’s more, one of the core issues that makes housing unaffordable — the shortage of suitable dwellings — is still unresolved and might have been exacerbated by the cost-of-living crisis.
“The demand for housing is increasing, but supply does not keep up,” said the OECD’s Kamal-Chaoui.
Responding to the housing shortage by erecting new buildings is difficult, mostly due to regulatory and space constraints that are particularly acute in larger cities, according to the OECD.
Building new homes has also become substantially more expensive in the past decade, particularly since the start of the pandemic. The industry bounced back in 2021, but last year saw another decline in the number of residential buildings approved for construction, even if the numbers are still significantly higher than pre-pandemic levels.
Some cities have tried to address the shortage by turning commercial and office buildings that emptied out during the pandemic into social housing, but that approach isn’t widely available as “not all cities have public social housing — many do not even own any housing stock,” said Kamal-Chaoui.
Municipalities are also struggling to come up with a housing policy that responds to residents’ changing needs, according to Kamal-Chaoui.
She noted that “the quality of life in large cities has declined, and people realize they want to have a nice life” in less hectic neighborhoods located in the suburbs or in medium-sized cities, which have begun experiencing a housing squeeze.
“Things are evolving so fast — what used to work maybe doesn’t anymore” and cities need to reconcile their ambitions with the budgetary constraints brought in by the cost-of-living crisis, according to Kamal-Chaoui, who added that mayors, regardless of their political leanings, are now treating the housing shortage as a priority.
“Some cities have been completely disengaged until recently, but now they are starting to act — they don’t really have a choice,” she said.
