The housing crisis deepens in developed countries
The housing crisis worsens as property prices rise and incomes stagnate, affecting affordability and economic well-being throughout developed nations.
In a nutshell
- Housing prices have skyrocketed, outpacing stagnating median incomes
- Many are overspending on housing, putting a strain on their finances
- The housing crisis is increasing wealth inequality and hindering social mobility
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The lack of affordable housing is spiraling into a global crisis. Many developed countries are grappling with housing inflation as real estate purchase prices have soared. The ability of families and even those with higher education to secure appropriate housing is on the decline and policymakers are scrambling for solutions.
In France, property prices doubled within eight years of the euro’s introduction in 2002, and they have continued to increase after a brief period of stagnation during the financial crisis in 2008. Real estate prices in Germany have also more than doubled since 2008. Across many countries on either side of the Atlantic, rents, which are often subject to some form of regulation, are increasing too, while growth in net incomes is failing to keep pace.
Addressing this crisis is important because housing accounts for a substantial share of the average household’s budget. Apart from taxes paid for the goods and services a government provides, housing is by far the single largest expense for most individuals and families. This includes costs such as rent or mortgage payments, property taxes, utilities and maintenance. As housing becomes relatively more expensive, the average person loses a sizeable portion of their purchasing power and economic well-being. Rising housing prices reduce purchasing power (creating a negative income effect), leaving people poorer in real terms.
Living in Paris: A back-of-the-envelope calculation
France, the eurozone’s second-largest economy, exemplifies the housing crisis and underscores the affordability struggles many face. French authorities advise individuals and families to spend no more than a third of their net income on housing. Landlords are supposed to reject tenants whose net income is less than three times the rental price.
In practice, almost no landlord follows this guideline, as it is extremely challenging to find suitable tenants – very few people earn enough money. For many, it has become impossible to find housing at affordable prices. As a result, they pay much more than a third of their net income just to have a place to live.
According to France’s National Institute of Statistics and Economic Studies, the average annual gross salary in the capital city is around 54,000 euros, topping the national average by just over 4,000 euros. This equates to roughly an average gross salary of 4,500 euros a month. Estimating what remains after taxes and mandatory contributions is complex and varies by individual circumstances and other factors. However, a reasonable approximation for the average net salary of a Parisian aged 25-44 is around 2,500 euros monthly. Meanwhile, the monthly rent per square meter is more than 30 euros on average, and for small studios, it is close to 36 euros.
This implies that the average Parisian in this age group would spend nearly half their net salary – about 1,200 euros – to rent a modest apartment of 40 square meters, excluding utilities like electricity, water and heating. In other words, if the average 25-44 year-old followed the state’s recommendation, they would only be able to rent a very small studio, all costs included.
This simple calculation illustrates the complicated housing situation in Paris, where income distribution is heavily skewed and more than half of the working population earns less than the average national income. The entry-level net salary for an associate professor at the Sorbonne University is just above 2,000 euros, 20 percent below the national average. Consequently, it has become nearly impossible for a family with two children to rent a suitable apartment in Paris, even if the household’s overall income is twice the median salary with both parents working full time.
Avoiding the rental trap by buying an apartment is out of reach for many due to high property prices. Those who do not already own or inherit real estate are in a dire situation. The problem, however, is not confined to major cities like Paris, although it tends to be more pronounced in metropolises. It ripples from European capitals and large cities to the peripheries of developed countries. The rising cost of housing is a widespread phenomenon that raises existential fears for many.
The rise of housing costs relative to income
Another metric demonstrating the challenge is the increase in real estate prices compared with rises in gross income. In the United States, residential house prices have consistently risen more when compared to growth in incomes over a given period. In the mid-1980s, the median American house purchase price was approximately three and a half times the median household’s gross annual income. By 2023, this figure had risen to over five times, an increase of more than 50 percent, demonstrating that home costs have escalated more rapidly than household earnings.
Today, the median household in the U.S. needs more than five full annual incomes to buy a home. If a person saved 10 percent of their total income exclusively for purchasing a home, and assuming current trends persist, it could take approximately 53 years to amass the necessary funds. The equivalent number of years during the mid-1980s was 35 years. So, like Europeans, the average American now faces a steeper climb to homeownership too.
The scarcity of suitable data for Europe makes direct comparison with the U.S. difficult, but many alternative indicators reveal similar trends. For instance, Eurostat provides data on median net income by education levels since 2014 for euro area countries. Comparing these incomes to the rise in house prices over the same period shows a clear drop in purchasing power – growth in housing prices has outpaced increases in median incomes by a wide margin.
Counterintuitively, the trend hits those with middle and high levels of education even harder. This is likely because those with tertiary educations typically earn a higher gross income, which is then taxed more heavily on the margin. Fiscal redistribution also plays an important role. The data suggests that the relatively well-educated segments of the population who are not yet property owners have particularly suffered from these developments. This is concerning because this group often includes highly motivated, ambitious and productive people. It is vital for any country to attract and retain such people to maintain economic growth and tax revenues.
Moreover, the period for which the ratio of net incomes to house prices is provided covers only the last decade, beginning in 2014, well after the housing bubble burst in 2008. Since then, housing has become even more expensive relative to net income, at least at the aggregated level across the euro area. However, there are some noteworthy differences at the individual country level.
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To delve further back in time and examine individual countries, other empirical indicators are required. As an earlier GIS report on inflation and wealth inequality highlighted, house price inflation has fueled increasing wealth-to-income ratios.
The European countries most affected by the housing bubble leading up to the financial crisis, including Italy, Portugal, France and especially Spain, are also those that have experienced the greatest increases in their national wealth-to-income ratios. As asset prices – particularly real estate – are disproportionately inflated, overall wealth rises relative to income. Homeowners become land rich and cash poor. This situation undermines upward social mobility for all groups that do not already own assets, especially real estate. People must now work longer and harder, and sacrifice more consumption, to become property owners − or even just to rent a place to live − than they did 10 or 20 years ago.
In Germany the housing bubble did not form before the financial crisis. Consequently, the wealth-to-income ratio remained relatively stable. Yet since then, as mentioned earlier, housing prices have more than doubled, causing the German wealth-to-income ratio to exceed those of Italy, France and Spain.
These developments primarily harm the social group that does not already own property and mostly relies on labor income. Their material well-being in terms of housing is likely to further diminish over time. In such circumstances, existential fears are not simply an outgrowth of irrational pessimism, but are grounded in experience.
Scenarios
Highly unlikely: Business as usual
Continuing down the path we have been on for decades with no change is possible, but seems highly unlikely given the size of the social group adversely affected by housing prices rising faster than incomes. In Western democracies, political reactions are bound to follow.
Suppose it is true that relatively well-educated people in Europe are affected more strongly, as some of the data presented here suggest. In that case, a political response is necessary to reduce the emigration of highly ambitious, well-educated, non-property-owning members of the already shrinking youth population. If someone is born into an affluent family, the incentives to leave Europe are not as strong. However, those looking to build wealth rather than just maintain it may find other locations more appealing.
The skills and brain drain has been ongoing for quite some time. Brain drain refers to the phenomenon where skilled workers leave their home regions for higher wages or improved living and working conditions elsewhere. According to the European Commission, this issue affects 82 regions, collectively accounting for nearly 30 percent of the EU population. Unfortunately, the current housing situation will not help reverse this trend. But will the right measures be implemented? Not necessarily.
Likely in some countries in the short term: Fiscal redistribution
The social dimension of rising wealth inequality and declining social mobility may prompt a default policy response of increased fiscal redistribution. Higher marginal tax rates, expanded wealth and inheritance taxes, and additional welfare spending are all likely responses in countries where the political establishment of social democracy remains in power. This applies to much of Europe despite the ascendence of right-leaning voters and politicians. While material inequality can be reduced through such measures, other issues, such as brain drain, may worsen, which is happening in some European countries like Albania. In the long term, other measures must be implemented to make genuine improvements.
Somewhat likely: Deregulation of housing markets
The blueprint for a scenario unshackling real estate markets is already taking shape. Argentina’s reforms under President Javier Milei have unleashed a wave of far-reaching changes across the economy. Among the most significant is the deregulation of the housing market, a reform that has delivered surprisingly positive initial impacts. His decision to repeal rent control laws in December 2023 has transformed the nation’s rental market, boosting housing supply and stabilizing rents.
Following President Milei’s model of deregulation could help restore affordable housing. On the supply side, it would remove restrictions aiming to preserve the affordability of housing in central locations which may then lead to a decline in rent or purchase prices overall.
Fiscal and monetary policy reforms are also crucial in this context. One of the main drivers of house price inflation has been the expansionary monetary policy that troubled Argentina for over half a century. This policy has also negatively affected Europe and the U.S. in recent decades. Fiscal discipline is essential for making tighter monetary policy feasible. President Milei and his team demonstrate how this can be achieved.
The reelection of Donald Trump in the U.S. could have significant implications for the American housing market and beyond, especially given his administration’s apparent alignment with President Milei’s approach. If Buenos Aires’ policies prove sustainable and the U.S. adopts certain aspects to address housing affordability, this may provide a model for other countries facing similar challenges.
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