Why is there a housing crisis and how do we fix it?

Anselm Leahy sits at a table in the white, pristine kitchen of his new Dublin apartment. “When I first came into the apartment, I was astonished. I couldn’t believe it,” he says, gesturing toward a big bay window in the living room that overlooks nearby houses and green fields. “I was over the moon.” The apartment is part of new social housing provided by the Focus Ireland Housing Association, part of the homeless charity Focus Ireland, which uses loans from the country’s Housing Finance Agency to build affordable homes. Leahy moved in just under two years ago, ending a spell of homelessness that began with the death of his father and his mother’s subsequent move into a retirement home. “My will to live was very, very low,” Leahy says. “To get this apartment has changed me in lots of different ways: mentally, physically, spiritually. I feel human again. I feel like I have a future. I have hope.” Cities like Dublin suffer from a shortage of affordable housing that has blocked many people – the unemployed, low-income families, migrants and young workers – out of the market. Over the past 15 years, average rents in the European Union have risen by one-quarter and house prices by half, while one in ten Europeans now spend 40% or more of their disposable income on housing. At the same time, the share of social housing in total supply has shrunk since 2010, even though the number of vulnerable people such as the homeless or new migrants has risen. Half of Europe’s housing stock was built before 1980, and much of it needs to be renovated. Many buildings are energy inefficient (a rating of D or worse). Bringing those homes and apartments up to new EU standards will be expensive and slow.

The lack of affordable housing translates into real hardship: young people put off starting families, students turn down the best universities, essential workers like teachers or nurses don’t accept jobs in in major cities – all because they are priced out of housing. “These people and their stories provide living proof of the housing crisis and the impact it has on Europe,” said Dan Jørgensen, the EU Commissioner for Energy and Housing, at a housing event hosted by the European Investment Bank (EIB) in early March. “It threatens social justice and social cohesion ... It weakens our economy and reduces our competitiveness.” The problem is clear: Over the last decade or so, housing demand has outstripped supply and incomes haven’t kept up with prices. The solution, however, is much more complicated. The European Union needs to build almost one million new dwellings to close the supply gap. That requires: innovative, faster and less costly ways of building; regulatory reform to speed up permitting and to create the investment framework for housing providers to deliver affordable new apartments and homes; financing solutions that encourage residential development and renovation. “We need to enhance the housing supply while also making better use of the stock we already have,” says Chiara Fratto, a European Investment Bank economist who researches housing issues. Why are housing prices so high? For decades now, people have migrated to dynamic urban centres to follow jobs, educational opportunities and new industries. That generally meant paying more for a place to live. But the equation of opportunity and cost has recently tipped out of balance. From 2013 to 2023, rents skyrocketed 50% to 100% in many major cities, such as Lisbon, Dublin, Budapest, Berlin and Luxembourg, according to the EIB Investment Report, which analysed the reasons behind Europe’s housing crisis.

Cities have become hubs of information and innovation, attracting highly skilled professionals, particularly in areas like technology. “In Lisbon and Dublin, you’ve had a large influx of foreign tech people with very high salaries. They are looking for a place to live very quickly, and very centrally located, and of course they push other people out of the market,” says Emily Sinnott, head of the Policy and Strategy Division in the EIB Economics Department, who co-authored the housing chapter of the Investment Report (“Social inclusion as a path to well-being and competitiveness”). “It’s a sign of the success of these cities.” Low-interest rates further fuelled demand, particularly as people spent increasing amounts of time at home with COVID-19 lockdowns and teleworking. “All around the world, you had big increases in real estate prices,” Sinnott says. Coastal cities and tourist destinations in particular have seen a rapid rise in rents and home prices. “There are examples like Majorca, like the Balearic Islands, where it’s just very, very hard for people to rent a home because there’s just not much there,” Sinnott says. The proliferation of short-term rentals, particularly through platforms like Airbnb, has been blamed for housing shortages, prompting some cities and towns to restrict short-term rentals. Sinnott is doubtful that such measures alone can solve the problem, but they can be part of the solution if complemented by other policies to bring more rental properties onto the market. Breaks on building The best way to tackle the problem is to increase the supply of housing. However, the pandemic further exacerbated the imbalance between supply and demand by making it difficult for developers to get the permits, materials and people needed to build new projects.

Residential construction slowed, and it was further weighed down by the higher interest rates governments put in place to tackle inflation, which spiked after the pandemic because of supply shortages and high energy prices caused in part by 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, gutted investment in new construction. “It really never fully recovered,” Sinnott says. The limited availability of new land in urban areas further complicated residential development. European city centres are already dense, and many of them have natural barriers such as parks or green spaces that make it difficult to expand. The construction sector also needs a revamp. While some big builders exist, they contract out much of the work to smaller firms, which have difficulty finding workers with the right skills. These smaller firms suffer from low productivity and don’t necessarily have the means to invest in digital tools or training that could make building more efficient. Roughly 75% of construction firms in the European Union do not invest in any kind of innovation activity, 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.” A host of companies in Europe are developing innovative technologies and materials to deliver better-constructed homes faster. The construction sector needs more support in integrating these new technologies into their projects. To offset high prices and sluggish 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), while slightly smaller ones exist in 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 can be considered as social housing, but their share of total housing declined steadily over the last decade, dropping three percentage points to 8% in 2021. The result is prices that far outpace growth in incomes. Housing winners and losers Housing and rental prices have surged steadily since 2010, even accounting for dips in 2011 and 2013 caused in part by the European debt crisis. From 2010 until the end of 2024, rents increased 26.7%, while home prices rose 55.4%. Some of the fastest rises were in Hungary (234%), Estonia (228%) and Portugal (120%). Italy was the only country to see prices decline (-4%). For those who already own property, ballooning house prices have been a windfall. Fratto, who co-authored the EIB Investment Report section on housing, says that this wealth creation has benefitted low-income homeowners as well, particularly since housing tends to make up a large share of their assets. “Homeowners benefited a lot from the increase in house prices because they saw huge increases in their wealth,” she says. Meanwhile, those with second homes in tourist hotspots have profited from rising values and lucrative rental markets. “For some people, like those providing accommodation, having a second home that you can rent has been a huge benefit,” she says. On the flip side, young people, renters, and first-time buyers are finding it increasingly difficult to get a foot on the property ladder. Even in countries where prices remained relatively constant, barriers like hefty down payments exclude many would-be buyers.

In Italy, residential prices have been stable, but downpayments that average around 35% of the purchase price keep homeownership out of reach for many. Overall, the share of young people and low-income groups that own their own home slid in the last two decades: Ownership rates for 24-to-35-year-olds decreased 5.9 percentage points from 2005 to 2023 (to 58% in 2023 from 64% in 2005), compared with 0.8% for the overall population. Ownership rates for low-income households fell 9 percentage points (to 62% in 2023 from 71% in 2005). People who have moved to other parts of the European Union are also penalised. Among people who relocated to an EU country less than ten years ago, 18% own their home, compared with 69% of people were were born in that country. That gap persists for years after arriving in the new country. More than two decades after relocating, 40% of non-native residents own their home, well below the home ownership rates for locals, according to the EIB Investment Report. That's a sign that people who move for economic opportunity – which is, after all, a good thing for Europe’s economy – end up being financially penalised. Economic consequences of high prices High housing costs deter people from moving to economically vibrant cities and regions. This immobility prevents companies or public bodies from finding workers with the right skills and pushes up salaries, ultimately slowing productivity and overall growth. It also weighs on innovation. Ambitious young professionals and entrepreneurs who want to move to big cities can’t find accommodation, which can stop companies from investing or expanding in regions unable to provide adequate housing. “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. The lack of affordable housing deepens social inequalities. Young people from less affluent backgrounds are unable to accept offers at top universities or jobs in major cities, limiting social mobility and perpetuating inequality. 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 difficulties also leave long-lasting economic scars. 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. How to solve the housing crisis 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. Construction needs to adopt more efficient ways of procuring materials and building, using more modular designs that allow for quicker construction, mass production that uses robotics, and innovative, new building 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. That would enable construction firms to invest in plants and equipment that would make increase their 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.” The EIB’s housing plan To tackle some of these issues, the EIB Group is introducing an action plan for affordable and sustainable housing. Under the plan, we aim to increase lending for housing to €4.3 billion in 2025. That money, along with advisory support, will be used to support three key areas: innovation, renovation and new building. The plan aims to: Increase financing and advisory support for innovative new construction methods and materials, through funds dedicated to support innovative construction methods and materials manufacturing; Push to extend lending across all EU members, while also sharing advice on building or improving the policy and regulatory frameworks that underpin investment; Expand the scale and reach of energy efficiency projects, especially building renovation, which will be complemented by advisory support for energy efficiency programmes and financial instruments; Expand investment across the publicly regulated affordable housing sector, with a focus on rental properties and pilot programmes that would help people eventually own their dwelling, depending on local regulations and safeguards; Test and scale up financing approaches, such as a new financial instrument for blending EU grant financing with loan financing from the EIB or other lenders. The EIB has been financing housing for over 25 years.

Tanguy Desrousseaux, director of the EIB’s Housing, Cities and Regions Department, points out that the plan will add momentum to lending and advisory activities, and allow for tried and tested solutions to be scaled up and new approaches to be developed with partners. “Delivering affordable and energy efficient housing – and using innovative construction technologies to bring down costs – is a key challenge across the whole European Union. The EIB has a unique opportunity to intervene across the housing value chain.” The EIB Group will work with the European Commission and national banks to implement the plan, which is key part of the Pan-European Platform for Affordable and Sustainable Housing being prepared by the European Commission. Explore our housing series and resources Invested in housing Our in-depth series looks at the reasons behind the housing crisis and the innovations that may solve it. Project finance and advice From small businesses and start-ups, to large corporations and local authorities, discover how we can help you. Stay informed Sign up to our “Better homes” newsletter to get the latest news and stories about our support for the housing sector. About the author Janel Siemplenski Lefort The European Investment Bank helps people and companies across the globe. As an editor at the bank, I tell its story. Stories you may like The European Investment Bank is helping Estonia build and renovate homes so that families, workers, and communities can have affordable places to live. Discover EIB funding models that close Europe’s affordable‑housing gap and cut energy bills LeapFrog brings financial services, healthcare and clean energy for millions of people in Africa and Asia.