High house prices are hurting young people, vulnerable groups and the European economy. Solutions to the housing crisis include expanding supply with faster and cheaper construction, more financing and less red tape.

The best way to make housing more accessible is to increase the supply. But the pandemic made this more difficult by disrupting permitting processes, delaying deliveries of materials and creating labour shortages. Residential construction slowed, and was further affected by rising interest rates, which governments introduced to curb inflation. That inflation was driven by supply shortages and surging energy prices, partly linked to Russia’s invasion of Ukraine.

Residential building was much more active in the 1990s and early 2000s. The global financial crisis, caused in large part by the unravelling of the US mortgage market, led to a sharp drop in investment in new housing. “It really never fully recovered,” Sinnott says.

Urban land is also in short supply. Many European city centres are already dense, and many of them have natural barriers such as parks or green spaces, leaving little room for residential development.

The construction sector needs a revamp. While big builders exist, they contract out much of the work to smaller firms, many of which face labour shortages and have limited capacity to invest in digital tools or training that could make building more efficient. Only about 25% in the European Union invest in innovation, according to the Investment Report. “These are very small firms,” Sinnott says. “They may not even have a computer. They are living from project to project.”

At the same time, a host of companies in Europe are developing innovative technologies and materials to deliver better homes, faster. The construction sector needs more support in adopting and scaling these solutions.

To ease the pressure on prices and supply, about half of EU countries provide some form of regulated social and affordable housing,  although the regulations and people who qualify differ widely. The biggest programmes are in Austria, Denmark and the Netherlands (20% of the housing stock), followed by Finland, France and Ireland (10-20%). Central, Eastern and Southern Europe provide the least social housing. In all, 14 million dwellings in the European Union fall into the social housing category, but their share of total housing has declined steadily over the last decade, dropping three percentage points to 8% in 2021.The result: housing costs have been rising faster than incomes.

• Read all the stories in our Invested in Housing series.

High housing costs discourage people from moving to economically vibrant cities and regions. This lack of mobility makes it harder for companies or public bodies to hire workers with the right skills, driving up salaries, and ultimately slowing productivity and growth.

High costs also weigh on innovation. Ambitious young professionals and entrepreneurs who want to move to big cities can’t find accommodation, which can deter companies from investing or expanding in those areas. “You can see all sorts of different scenarios in which housing shortages impact productivity,” Sinnott says.

A study in the United States found that improving the availability of housing  in key cities could have raised aggregate gross domestic product by up to 9%. Fratto is trying to replicate the same sort of analysis for European housing markets.  

Limited access to affordable housing also has social implications. Young people from less affluent backgrounds may turn down offers from top universities or jobs in major cities simply because they cannot afford to live there. Sinnott notes: “You get into the best university in your country, which is generally in the capital city, and you can't go if your parents aren't well-off.”

Housing shortages have long-term effects. People who found themselves homeless at one point have less chance of being employed in the future. Over 13 million people in the European Union experienced housing difficulties in the past five years. Those people were more likely to be unemployed – 15% vs. 8% in the rest of the population – even when the reason for being homeless was not financial.

The solution sounds simple: build more homes. But building more homes, quickly and relatively cheaply, faces obstacles that vary from place to place:

• Construction needs more innovation and investment to improve productivity. This means adopting faster and more efficient ways of working: from procuring materials to more modular designs, mass production that uses robotics, and advanced materials that improve energy efficiency and cut emissions. Public money used to fund housing projects could be directed towards these kinds of construction, providing more stable demand. This would enable construction firms to invest in equipment and facilities needed to increase output and bring down costs.
• Regulatory barriers and the lengthy permit processes slow down residential projects. Housing construction is subject to regulations at the EU, national, regional and local levels, resulting in a high degree of complexity and reams of red tape. Harmonising regulations and encouraging standardised measures of building performance (energy, for example) would foster innovation. More land also needs to be made available for residential development, which would facilitate large-scale housing projects.
• More investment is needed in energy efficiency and building renovation. The density of many European cities means that we need to make the best use of the housing we already have by renovating old and dilapidated homes and apartments. Refurbishing buildings would improve living conditions and bring down energy costs. Renovations are expensive, however, particularly for homeowners. We need new, innovative ways to finance energy efficiency investments.
• Social and affordable housing needs more money and a better regulatory framework. New financing models could be used to attract investment, but they need to be paired with public policies that aid the development of social and affordable housing. Many countries lack the legal and policy framework that would encourage the creation of affordable housing providers, although they are trying to develop these frameworks based on guidance provided by other EU countries. Finding new ways to blend grant funding with commercial funding will also help leverage private capital.

The European Investment Bank has financed nearly a half a million social housing units across 16 countries since 2018 – including the Irish housing association that built Anselm Leahy’s new apartment. But we, and everybody else, need to do more. The housing crisis is increasing inequality and limiting opportunities for an entire generation of young people. “It creates all these intergenerational issues,” Sinnott says. “You have problems providing basic public services. You block people out of a source of wealth. You prevent needed migration.”

“The housing crisis,” she says, “fundamentally puts Europe’s economic and social model under strain.”