Living

January 2025 Forecast

Worsening housing shortage

Europe's housing shortage is estimated at 3.5% of total housing stock, equating to approximately 9.6 million required homes. This situation is expected to be exacerbated by declining levels of new construction permits, despite rising demand. Housing delivery is expected to reach only 64% of desired levels in 2025, despite existing production targets and stimulus packages.

Mid-year review

• In 2024, the number of permits issued continued to fall, with just 60.5% of the targeted level of permits being granted. Early indicators for 2025 show a continuation of this trend. In addition, the demand for housing is still increasing, partly due to high migration rates.
• Migration and the housing market continue to dominate national and local election agendas, with governments exploring incentives to increase housing production. Nevertheless, in the coming years, the housing shortage is expected to exceed ten million homes.

January 2025 Forecast

Affordability challenges and regulations

Rising rental costs and tight markets are exacerbating affordability issues for tenants, leading to discussions about regulatory interventions, despite past measures like rent controls being shown to potentially worsen the situation. Increased privatisation and reduced rental options further complicate the affordability landscape, risking a surge in rental prices.

Mid-year review

• Partly because of the continuing scarcity of housing, the debate around affordability remains. However, looking at the latest Oxford Economics forecast of income growth in the EU (a 4.6% year-on-year increase in 2025) and rent increases (4.3% growth according to CBRE’s forecast), affordability looks to see a slight improvement overall.
• Housing remains a key issue on political agendas, with more countries focusing on improving affordability to boost new construction rather than increasing regulations, a clear tilt in policy. Recent examples can be seen in Ireland and the UK.After several years of restrictive rental policies in Ireland, the Government is legislating to encourage new housing construction. In the UK, a new £39 billion affordable housing programme is being introduced to boost construction of new social housing. More countries are expected to deregulate their housing markets to increase investment in the coming years.

January 2025 Forecast

Privatisation increases affordability issues

A combination of elevated interest rates (2022-2023) and the expansion of rent regulation across Europe has significantly increased the pricing gap between owner-occupied and rental properties. This shift is anticipated to incentivise a privatisation strategy among investors, reducing the supply of rental housing. This will exacerbate existing affordability challenges within the retail market.

Mid-year review

• An increasing trend is privatisation in the rental housing market. Private equity investors and family office investors are buying up rental properties to eventually sell them on the owner-occupied housing market. This activity will slow the expansion of rental housing supply, and will potentially lead to stagnation or contraction, exacerbating existing affordability and availability concerns.
• These trends are anticipated to persist and broaden in scope, largely influenced by the divergence between vacant possession values and capital values. The precise extent of these impacts will be contingent upon several factors, including the characteristics of the specific properties, tenant turnover rates, the strength of existing tenant protections, and anticipated developments in vacant possession value.

Permit levels fall short of expectations

Poor prospects due to low European permit levels

Most countries have seen a decrease in permits since the beginning of the year due to: (1) increased regulation, (2) slow decision-making and limited capacity in the permitting process, and (3) profitability concerns due to the ratio of yield potential to rising construction costs.

This ensures that current building permit levels are still far behind their 2021 peak. In Finland, Sweden, Germany, and Austria, particularly, the number of permitted housing units remains well behind government targets and market needs. In cities like Hamburg, Frankfurt, Stockholm, Gothenburg, Dusseldorf, and Turku, this stagnation has caused a sharp rise in rents of over 6% year-on-year. 

Due to the ongoing housing shortage, the pressure on rents continues. Rents are also expected to rise on average by c. 3.3% per year in major European cities between 2026 and 2030.

Bold incentives needed to fix the market

Addressing Europe's housing shortage demands a multi-pronged approach, with significant incentives rolled out at European, national, and local levels. 

The European Commission is scheduled to unveil its Action Plan for Affordable Housing in 2026. A key component of this plan will be a decision on subsidised financing for affordable, mid-range housing. Crucially, this financing strategy must ensure a fair and competitive environment for both investors and social housing organisations. This balanced approach is essential to unlock the full financial potential needed to effectively alleviate the housing crisis across Europe.

On a national and local scale, the focus should be on reducing regulation, reducing permit processes, and increasing the work capacity of local authorities to expedite the granting of permits and allow capital to be deployed.

 

Figure 4: Residential permit level in 2024 (thousands) vs 2024 permit level relative to recent peak (%)