How did housing costs in Europe change in the aftermath of the Great Recession? Marco Pomati, Rod Hick and Mark Stephens present evidence from a study of housing affordability in Europe between 2010-2018, finding that while affordability problems did not appear to increase over this period, they did become more concentrated in the rental sector.

Of the many meanings given to the term “housing crisis” in Europe, the one invoked most frequently concerns the affordability of housing. We know that house prices have grown across the Eurozone for over a decade and that an increase in sale prices often goes hand in hand with an inability of families to afford their monthly housing costs.

Yet one-off prices and ongoing housing costs are not the same, and evidence on the latter is scarcer and has not featured so prominently in recent public debate. Our interest is in the extent to which housing costs, for both owners and renters, are unaffordable given their current incomes.

A budgetary measure of housing costs

In a recent study, we set out to investigate trends and inequalities in affordability by looking at a housing costs-to-income ratio, or the percentage of disposable household income that goes towards housing costs, measured by rent or mortgage payments as well as property taxes and utility bills. More specifically, our primary measure of interest is the EU Housing Cost Overburden measure, which identifies households who spend more than 40% of their disposable income on housing costs.

Contrary to previous studies, we include mortgage principal repayments in our measure of housing costs. This gives us a better idea of how much of the disposable income of households is taken up by housing for mortgage owners and to better compare affordability problems between owners and renters. We also explore trends in those who face a housing cost overburden scenario and are also below 60% of median income (the EU’s poverty threshold).

This dual focus enables us to better understand the broader implications of housing affordability, particularly for the most vulnerable populations. We carried out our analysis using individual responses from household heads aged 20-59 to the EU Statistics on Income and Living Conditions survey between 2010 and 2018 across 28 European countries, focusing especially on the period between the Great Recession and the COVID-19 pandemic.

Stability amidst housing affordability inequalities

The overall housing costs-to-income ratio for countries was rather stable in most of the 28 European countries over this period, in some nations rising modestly between 2010 and about 2014, only to fall again by 2018. The most notable exception is Greece, which experienced an alarming increase in cost burdens between 2010 and 2015, which was only very partially reversed by 2018. Other notable exceptions include the UK, Romania and Croatia, and there was also a sharp increase over the period in Bulgaria.

However, what is arguably most significant is the relative stability of ratios in most nations, and especially in the period 2013-2018, when house prices were rising quite consistently in Europe. We find similar trends when looking at the percentage of households experiencing a housing cost overburden scenario and who fall below the poverty line, as well as those who say that their housing costs represent a heavy burden.

Our analysis suggests that there was a widespread deterioration in affordability in the years leading up to the Global Financial Crisis, yet, with a few exceptions, this did not worsen consistently between 2013 and 2018. Further analysis suggests that this is because average housing cost increases were often matched by increases in average household incomes, particularly in the second half of the period and especially in Central and Eastern Europe. That said, we also find that countries can arrive at stable or declining cost burdens via quite different trajectories in relation to housing costs and incomes. In our paper we provide further reflections on possible reasons for this apparently counter-intuitive finding.

GDP, poverty and housing policy

We also compared differences in housing affordability between countries as well as changes within countries, adjusting for country demographic differences. We find that both economic as well as housing-specific variables contribute to country-level affordability.

The overall size of the economy (GDP per capita) is associated with considerably lower housing cost overburden rates, but it’s not just overall wealth that counts. Countries with more relative poverty (a greater proportion living below 60% of national median income) have higher rates of housing cost overburden, even if we take account of GDP differences. We also find that this dynamic shows up strongly in changes across time within countries. However, housing allowances and rent regulation can attenuate the negative effect of relative poverty on housing affordability.

The increasing burden on Europe’s renters

Lastly, we find that affordability has decreased for renters compared to mortgage owners, even when we account for differences such as dwelling types, employment status, location and age. In other words, when we compare mortgage owners and market renters in similar dwellings and with similar socio-economic characteristics, we find that market renters are more likely to be overburdened by their housing costs.

These findings are particularly striking given that our measure of housing costs includes mortgage payments, which better-off mortgage owners may see as an investment justifying high-cost burdens. If we look at those who spend more than 40% and are also below the relative poverty line, renters (whether paying market or reduced prices) also show up as being consistently worse-off than mortgage owners across most countries.

Improving affordability

Our research examines the crisis in housing affordability across the European continent. With some notable exceptions, the percentage of disposable household income that goes towards housing remained relatively stable between 2010 and 2018 across most of the 28 European countries we considered in our analysis. However, this stability masks a growing concentration of housing affordability problems among renters.

We find that tenure remains an important variable in housing research outcomes, and that it may have become more important in European societies in the last decade. The nexus between GDP, poverty and housing unaffordability is clear, but our research also highlights the importance of increasing affordable housing supply, especially of reduced rent and affordable homes as well as the consideration of other housing policies – from allowances to rent controls – in improving affordability.

For more information, see the authors’ accompanying paper in the Journal of Social Policy. This work is part of a broader project examining the relationship between housing and poverty in Europe, funded by the Economic and Social Research Council.

Note: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: Clare Louise Jackson / Shutterstock.com