Affordable housing in Europe needs creative ideas to bridge funding gap

If there are so many people who need housing, why doesn't the market simply provide them with places to buy or rent at whatever price can be sustained? The difficulty of financing affordable housing comes down to one fundamental economic hurdle: building decent housing at prices people can afford is just not profitable enough for private developers. Building new homes has become too expensive, and the scarcity of sites means developers tend to focus on the higher end of the market where profits are highest. When you add the word “affordable” to the mix, you have what economists call a market gap—a need that the market just isn't filling.

“When we’re talking about ‘non-market’ housing, which is housing at below-market rates for citizens who cannot afford housing at market prices, then you depend on some kind of public support, because the business case for building such properties just doesn’t work without it,” says Gunnar Muent, a senior advisor at the European Investment Bank who's working on the response of the EU's financing arm to the housing crisis. "Without public support, such projects would be loss-making or barely profitable. The further away from the market price you go, the more public support you need."

Construction costs have increased dramatically—by as much as 48% between 2010 and 2023. Land prices in many regions have also surged sharply. Regulatory burdens have accumulated over decades, creating significant obstacles for anyone looking to build a new home. Administrative uncertainty further compounds these challenges. Developers must finance multiple projects simultaneously to ensure future construction pipelines, knowing that at any time progress could be stalled because of protests by neighbours, legal changes, or delays in obtaining building permits. "Every year there are just new regulations, new rules, new events that make things more difficult,” says Joël Schons, head of the European construction industry federation, FIEC. “If you continue to add new regulations every year, at a certain point, it becomes too much. It’s a lot of those uncertainties that also add to the price of housing. Somebody somewhere has to pay it."

And because so many are having to pay too much, or simply more than they can afford, we have a crisis, which is especially acute in cities and coastal towns. The European Union already has a number of instruments to support housing across Europe, but here are how some key EU institutions are trying to go further, with new approaches to financing and advisory work that targets the entire housing value chain.

The aim: to build more houses that people can actually afford.

While public financial support is crucial to building affordable housing, simply throwing money at the problem won’t fix everything.

In many countries, insufficient policy frameworks, cumbersome regulations, or a lack of local expertise can be significant obstacles to investment, which is where the European Investment Bank’s advisory services step in. 

"Perhaps the most important role of advisory is to help countries which don't have policy frameworks or don't have regulations on affordable housing to build those frameworks," says Gerry Muscat, who leads the European Investment Bank’s advisory services for housing. This is also a way to adapt and apply successful practices from countries like France, Austria and Netherlands which have been running successful affordable housing systems for decades. This European experience — “A real treasure trove which is unique in the world” —, says Muscat, can inspire housing finance systems both inside and outside the EU.

In November 2024, for example, the European Investment Bank signed an agreement with five Croatian cities – Zagreb, Rijeka, Split, Osijek, and Varaždin -- to develop local guidelines and identify best financing approaches for social and affordable homes.

The Bank’s advisory services are also working on innovative solutions in areas such as converting office buildings into housing and guidance for public private partnerships.

• Read all of our Invested in Housing series.

Clearly there is political momentum behind a financial solution for the housing crisis. Last autumn, the European Commission appointed its first ever commissioner for housing, Dan Jørgensen, who is also responsible for energy policy. He is tasked with developing a European Affordable Housing Plan, and has appointed a task force which is working closely with the European Investment Bank. In April, the Commission issued a proposal to modernise EU cohesion policy and included affordable housing among five strategic priorities to which Member States and regions are encouraged to refocus their current programs. 

The European Parliament has created a special committee to come up with recommendations to address the housing crisis. The committee has called for urgent action and quick wins, including: 

• regulating short-term rentals 
• focusing on housing for students and the elderly 
• boosting new construction and renovation 
• repurposing vacant units 
• increasing EU funding 
• mobilising private investment for affordable housing. 

"I'm very optimistic,” says the industry confederation's Schons, “because I really hope that now everybody is getting the urgency and the problematic nature of housing for the European Union. I never felt this urgency from regulators before. I never felt they were seriously taking care of the housing problem. But now housing is finally getting a little of the attention it deserves.”