Housing cracks: Multi-pronged policy approach required

Unaffordable and inadequate housing is a problem throughout the EU. House prices are increasing, rent is going up, interest rates have climbed, even the cost of keeping a house warm has escalated – and disposable income simply cannot keep up. While better-thought-out housing policies are a key part of the solution, aspects of the housing crisis could also be tackled by improving public services, better urban planning and ensuring that social protection benefits reach the people who need them most.  

Housing crisis impacts almost everyone

The fact is that many people are struggling to make ends meet due to the cost of housing: home owners and renters; rural and urban; young and old.

People trying to buy or rent accommodation are looking at significant cost increases compared with a few years ago. House prices and rents have increased faster than disposable income (see figure below). Up until recently, mortgage interest rates were at record low levels, holding down mortgage costs somewhat. Current buyers, though, face both high prices and high interest rates.

Even people who own their homes outright (without a mortgage) are struggling with higher housing costs. Many are older people living in rural areas, whose incomes are often low, and people whose homes are energy-inefficient. They find themselves unable to maintain their homes at a suitable temperature due to poor energy performance and financial strain: this is true of at least 15% of outright owners in Bulgaria, Cyprus, Greece, Lithuania and Portugal. The cost-of-living crisis has further disturbed the delicate balance of housing costs and other household outgoings.

Young people are disproportionally hit. They are living with their parents for longer because they cannot afford to move out. When they finally do, they spend more of their income on housing than other groups as they tend to have lower incomes and higher housing costs. These days it’s more likely that this money is spent on rent rather than buying a house, especially in cities where many move for work. Between 2010 and 2019, renting became more common both among young people aged 20–29, with prevalence increasing from 66% to 68%, and – in particular – among people aged 30–39, increasing from 38% to 45%. Reduced homeownership among young people is not a problem for quality of life in retirement if rents are affordable and retirement income sufficient. But concerns arise for people who are likely to experience high housing costs and low old-age income, including self-employed people who accumulated few pension rights.

Households whose housing costs – which not only include mortgage interest or rent payments, but also maintenance and utility costs – are over 40% of household income are particularly likely to experience financial strain, with over three in five reporting difficulty making ends meet. The figure below illustrates the precarity caused by housing cost overburden: most adults in this cohort have difficulty making ends meet. However, housing cost overburden does not always lead to financial strain; its impact is partly determined by people’s income and needs. It can put low-income households with children under major financial strain, for instance. 

Tackling the housing crisis demands a two-pronged approach. First, more needs to be done by traditional housing policy to meet the needs of the population, while avoiding potential distortions of the property market. Second, other policy areas could be focused more deliberately on helping to maintain people’s living standards even if much household income goes towards housing costs.

Steps to stabilise the sector

The fact is there is no single solution: the multifaceted nature of the housing crisis requires a delicate balance of measures.

Existing housing policy encompasses a wide range of measures to provide and support housing.

Measures to increase housing supply are the most obvious solution, but it can take several years for new housing to come on stream. More effort should be made to boost supply by renovating older accommodation and discouraging property owners from leaving dwellings empty and engaging in speculative real estate practices. 

Various types of housing support schemes operate across the EU, including social housing (rental accommodation provided at below-market rents), rent and mortgage or purchase subsidies, and support to pay for utilities. Besides reaching few people in most of the Member States, such schemes often have fixed income thresholds for eligibility, which has the drawback of failing to support people with incomes just above this threshold. This ‘twilight zone’ problem (i.e. earning too much to qualify for support, but too little to be able to afford housing) raises the issue of fairness, while beneficiaries with below-threshold incomes are disincentivised from maximising (or declaring) their income.

Governments frequently use mortgage and rent subsidies to help people with housing costs. While they can be important for certain groups of recipients, they can backfire. Subsidies can drive up prices, and mortgage subsidies can cause people to take out larger mortgages, which could lead them into over-indebtedness. 

Greening measures (such as house insulation, upgrading heating systems and installing solar cells) help to reduce energy costs and protect households from energy price increases. Besides benefiting the natural environment and household finances, improving energy efficiency can also contribute to people’s health by reducing cold- and heat-related health problems and improving air quality inside and out. However, these measures need to reach and assist people with low incomes better, including private and social tenants and homeowners. 

New ideas needed to rebuild better

The fact is that we need more than just housing policy to solve the housing crisis.

Important as good housing policy is, other approaches can be taken to reducing the burden of housing costs. Access to good quality public services such as healthcare, childcare, education and transport could prove significant in preventing high housing costs from reducing standards of living. All else being equal, spending 40% of one’s income on housing is likely to be more problematic for someone with significant healthcare and transport needs than someone without those needs unless healthcare and transport are accessible and available at low or no cost.

Improving the quality of the local area in neighbourhoods that are currently disconnected from jobs and services, unsafe and lacking green areas could be a viable option to increase the supply of affordable housing. In particular, high quality public transport and cycling infrastructure would connect these areas with employment centres at low cost (or free) for users. This has the potential to improve the situation for the many people pushed out of expensive city centres into apartments in suburbs. Such a policy would be a triple-win: good for people’s financial resilience, population health and the environment. However, as such measures also improve liveability of local areas more generally, they can drive up house prices and rents, leading to gentrification, with higher-income groups moving in and low-income groups moving out. It is important therefore that such neighbourhood improvements are implemented at a massive scale.

Improving people’s income security by effective social protection systems is also key. It is not only legal entitlements that matter: benefits also need to actually reach the people who are entitled to them. In the case of minimum income schemes, for instance, in each Member State between around 20% and 50% of people entitled to these benefits do not receive them. 

Looking ahead  

Housing problems affect people’s health and well-being, embody unequal living conditions and opportunities, and result in increased healthcare costs, reduced productivity and environmental damage. They also contribute to labour shortages in areas with low income–housing costs ratios. These shortages are common in education, childcare, public transport, healthcare, long-term care and other services, posing challenges for the delivery of such services.

Homeowners, prospective homeowners and renters alike are dependent on policy interventions to make housing accessible and affordable. By widening the policy perspective, more can be done to make housing costs manageable. The housing supply needs to be increased by building and renovating, preventing dwellings from being left empty, and improving neighbourhoods. Measures to improve the energy efficiency of homes need to reach low-income groups, protecting them from future energy price increases. Furthermore, general social protection measures, such as a minimum income schemes and good access to services (including education and healthcare), can be key in ensuring that housing can be affordable.

Housing is a roaring political issue in almost all Member States. At this point there is not much that can be done at EU level beyond sharing experience and best practices. However, as this problem negatively impacts on other important  areas such as demography, labour mobility and work-life balance, a common EU approach will almost certainly be foreseen.  Overall, policy makers should focus on increasing housing supply by building, renovating, and discouraging leaving dwellings empty, with an important role for greening of housing and improving local areas. Furthermore, the housing crisis once again calls for reinforcing the European Pillar of Social Rights, ensuring effective social protection, well-functioning labour markets, and access to quality services.

Images © te lun ou yang/Unsplash