Living

Europe's housing shortage is expected to worsen, with an estimated 9.6 million new homes needed to meet demand amid falling permit levels for new construction. Rising rental costs and increased privatisation will exacerbate affordability issues for tenants in 2025. Policymakers face growing pressure to intervene, but measures like rent controls may further limit housing availability.

Key Takeaways

1. The European housing shortage has risen to approximately 3.5% of current stock, equating to c.9.6 million homes. The shortage is expected to worsen due to declining permit levels for new homes, despite rising demand.
2. While the share of housing costs relative to disposable income has decreased, tenants face significant affordability issues. These are caused by declining rental stock and rising rents, prompting discussions on regulatory interventions.
3. Forecasts suggest a possible recovery in housing delivery by 2025 as rising home values may improve profitability for developers. However, current construction targets still fall short of meeting demand, indicating there is still a long way to go to resolve the housing shortage.

European housing shortage expected to worsen, increasing discussion around affordability and regulation

Housing shortage expected to increase despite national construction targets and stimulus packages

The impact of higher interest rates continues to affect the European housing market, despite a significant decline in rates since the end of 2023. Permit levels for new homes are decreasing, while demand is increasing unabated. In 2024, the European housing shortage is estimated to have increased to 3.5% of the current stock, or approximately 9.6 million homes*.

Current European permit levels indicate that the housing shortage will worsen over the next year. We estimate that it would take more than four years of housing production to fully resolve the shortage, regardless of household growth. Although clear annual construction targets and stimulus packages exist in many European countries, actual production is falling short, projected to reach only 64% of desired levels next year.

*Estimation based mainly based on local sources within Europe

Permit levels expected to increase in 2025, but not sufficiently to reduce the shortage

We believe that there is potential for recovery in 2025, as rising home values and capital values are narrowing the gap between construction costs (including land prices) and exit values. This trend will boost permit levels into 2025.

House prices in the owner-occupied market have declined less than those in the investment market. The trend makes it easier for developers to build a residential complex with a larger share of owner-occupied homes. However, we note that in some countries, the owner-occupied market is still struggling to sell all its homes, primarily due to higher mortgage costs.

Figure 7: New home construction permits (Index Q2 2021=100)

Nevertheless, an improvement in vacant possession values and an increase in capital values will boost appetite for development in the near future. Realistic land prices, flexible construction programmes, and deregulation in several countries can further speed up the process.

Despite increased demand, rental stock is under pressure in some countries due to increased privatisation

The growing gap between capital values and vacant possession values is prompting many investors to sell their properties in the owner-occupied market.

Private equity firms are also exploring these opportunities in the European living market, which may restrict the short-term availability of rental housing stock in several countries. This trend will further limit the availability of affordable rental options, leading to increased rental growth and additional pressure on affordability. 

This will also affect the student housing market. Some students in Europe use the private rented sector (PRS), which means that they too will experience more shortages. In addition, there is a clear trend in which Gen Z has a need for better quality PBSA complexes with more amenities, which means that this market is growing strongly. This is being addressed by investors who are also increasingly investing in the PBSA market in Europe.

Figure 8: Construction costs, vacant possession value and capital value, European average (Index Q2 2021=100)

Despite lower share of housing costs as a proportion of disposable income, discussions surrounding affordability are growing

Tight rental markets and increasing rents, especially in heavily urbanised areas across Europe, have led to more acute affordability issues among tenants than owner-occupiers. Housing cost overburden, defined as housing costs exceeding 40% of disposable income, is more frequently present among tenants than among owner-occupiers. This is a result of the greater demand-supply imbalance in the rental market. A sharper reduction in rental stock, with a corresponding increase in rents, would further exacerbate the affordability issues that tenants currently face. We expect average rental growth of 2.7% in 2025 for the 32 key cities we track within Europe. This is largely in line with expected wage increases.

Interestingly, despite the overburden rate among tenants paying market rent having fallen to its lowest level since the Global Financial Crisis – mainly due to widespread wage increases – politicians and policymakers are still grappling with increasing societal pressures to curtail rising housing costs. 

In most cases, like Germany, The Netherlands, Ireland, Scotland, and Catalonia, government intervention has mainly taken the form of rent controls, which have further exacerbated the issues of low housing availability and affordability. Consequently, there is a real risk of further policy measures being implemented across Europe to limit rental growth, which could have damaging effects for households seeking to rent in the coming years. 

Figure 9: Breakdown of households by financial burden* vs. tenants with housing cost overburden** in Europe