Introduction: Europe’s Housing Affordability Crisis

Europe is facing a housing affordability crisis of historic proportions. Over the past decade, home prices in major European cities have soared, far outpacing income growth. In countries like Germany, house prices increased by 80% between 2010 and 2022, while rent in cities like Dublin and Amsterdam surged by over 50%. The affordability gap has widened to a point where owning or renting a home is now out of reach for millions of Europeans, particularly younger generations.

While housing shortages, zoning laws, and speculative investments are well-recognized contributors to this crisis, one critical factor remains underexplored: the role of monetary policy. Decisions by the European Central Bank (ECB) have had profound effects on housing markets across the continent. This article delves into how ultra-low interest rates, quantitative easing, and the rate hikes in recent years have influenced Europe’s housing market, with far-reaching implications for homeowners, renters, and policymakers.

How Low Interest Rates Fuelled a Housing Boom

For over a decade following the 2008 financial crisis, the ECB pursued a policy of ultra-low interest rates to stimulate economic growth and ward off deflation. By 2016, the ECB’s main refinancing rate had fallen to 0%, with deposit rates dipping into negative territory. This unprecedented era of cheap money spurred economic activity but also unleashed a housing boom that significantly worsened affordability.

The Mechanics of Low Rates and Housing Prices

Low interest rates reduce the cost of borrowing, making mortgages more affordable for households. Between 2012 and 2021, average mortgage rates across the Eurozone fell from 3.8% to just 1.3%. Such a decrease triggered a surge in demand for housing, as buyers sought to lock in cheap financing. However, the supply of housing could not keep pace with this increased demand, leading to significant price increases.

For example:

• In Spain, property prices rose by 70.5% between 2014 and 2022.
• In Germany, the housing market doubled in value during the same period.
• The Netherlands experienced a 72.4% increase in home prices between 2013 and 2022.

At the same time, low rates incentivized institutional investors to pour capital into real estate markets, seeking higher yields amid lacklustre returns in traditional financial assets like government bonds. The ECB’s bond-buying programs, part of its quantitative easing (QE) measures, exacerbated this trend by compressing yields on sovereign and corporate debt. Between 2015 and 2022, institutional investors such as private equity firms and real estate funds became dominant players in markets like Dublin and Paris, driving up prices further.

Widening Inequalities

The housing boom disproportionately benefited wealthier households, who were better positioned to access cheap credit and invest in property. According to the ECB’s Household Finance and Consumption Survey, the top 10% of households by wealth saw their net housing wealth grow by 45% between 2010 and 2022, while middle- and lower-income households struggled to save for a down payment. Renters, meanwhile, faced rising costs as landlords passed on their higher acquisition costs to them.

The Impact of Rate Hikes on Affordability

Since mid-2022, the ECB has embarked on a rapid tightening cycle to combat surging inflation in the aftermath of the pandemic, incrementally raising rates until its main policy rate reached 4.5% by late 2024. This marked a sharp departure from the previous era of cheap money, fundamentally reshaping housing markets. The resulting shifts have been complex, with significant implications for both affordability and broader economic dynamics.

Rising Mortgage Costs

The rise in interest rates has significantly increased the cost of borrowing, leading to affordability challenges for prospective homebuyers. In the Eurozone, average mortgage rates climbed to 3.9% in 2024, up from just 1.3% two years earlier. For a typical €250,000 mortgage with a 25-year term, this rate hike translates into an additional €400 in monthly payments—a 30% increase in household expenditure on housing.

This sharp increase has disproportionately impacted first-time buyers and lower-income households, who are more sensitive to changes in monthly costs. As a result, demand for new mortgages plummeted. According to the ECB’s latest Bank Lending Survey, the number of new mortgage approvals in the Eurozone fell by 35% between 2022 and 2024, with notable declines in France (-40%), Italy (-38%), and Spain (-33%). 

The impact has been more pronounced for households with variable-rate mortgages, which are prevalent in countries like Spain, where nearly 42.2% of mortgages follow this structure. The rise in variable rates has dramatically increased monthly payments for existing borrowers, contributing to financial distress. Meanwhile, those who might have considered entering the housing market have increasingly deferred such decisions, particularly in countries where fixed-rate mortgages offer less protection against rate hikes. Addressing the balance between fixed and variable mortgage structures in policy could therefore play a key role in stabilizing housing affordability across Europe.

A Cooling Housing Market—But Uneven Effects

In many markets, higher borrowing costs have led to declining house prices. Sweden’s housing market experienced a 11.55% drop in prices between 2022 and 2024, while Finland saw declines of 9.16%. However, in countries like Germany and the Netherlands, price corrections have been less pronounced, reflecting persistent supply constraints and robust rental demand. For example, Germany continues to face a shortfall of approximately 800,000 housing units nationwide, which has buffered price declines in key urban areas.

Renters have faced mixed outcomes. While slower house price growth has alleviated some pressure on landlords to raise rents, the higher cost of borrowing has made it more expensive to finance rental properties. This has led many landlords to pass on these costs to tenants, particularly in high-demand cities.

Pressure on Overleveraged Households

Existing homeowners with variable-rate mortgages have borne the brunt of rising rates. In Spain, with its high share of variable-rate mortgages, average monthly payments have surged by €280, pushing many households to the brink of financial distress. The ECB estimates that in the first quarter of 2024, 30% of Eurozone households made late mortgage payments, up from 15% in the last quarter of 2023. 

Conclusion: A Multi-Pronged Policy Response

Monetary policy has played a critical role in shaping Europe’s housing markets, but its limitations are evident. While low interest rates and QE measures contributed to housing price inflation, recent rate hikes have introduced new pressures on affordability. Solving the crisis requires coordinated fiscal and housing policy interventions.

Fiscal and Housing Policy Interventions

Governments must address supply-side constraints by accelerating the construction of affordable housing. Key measures include:

• Subsidies for developers to offset rising costs.
• Relaxing zoning laws to streamline the approval process for new projects.
• Repurposing underutilized land for housing, particularly in high-demand areas.

Examples of such policies can already be observed across Europe, illustrating their potential benefits. For instance, Portugal’s government recently announced a policy enabling city halls to authorize building on rural or non-urban land, provided that 70% of the construction is allocated for affordable housing. This initiative demonstrates how creative use of land policy can enhance housing supply while addressing affordability challenges. Similar measures, tailored to each country’s unique real estate and housing dynamics, could provide significant relief across the continent.

For renters, targeted subsidies and stronger tenant protections are essential to mitigate the impact of rent inflation. In addition, fiscal policies such as taxes on vacant properties or speculative investments can discourage hoarding and redirect capital toward productive uses. Expanding social housing programs, as seen in Austria, could provide a robust safety net for vulnerable households. Vienna, for instance, has one of the most comprehensive social housing systems in Europe, with social housing accounting for approximately 48% of housing in the city. Across the European Union, the share of social housing is much lower, displaying Austria’s relative strength in this sector. This disparity highlights the potential for other nations to scale up their programs, using Austria as a benchmark for providing affordable housing options to low-income families and addressing rental market challenges.

Central Banks and Housing Market Stability

Central banks, including the ECB, must refine their approach to monetary policy to minimize unintended consequences for housing markets. While the ECB’s sole mandate is to ensure price stability, and its independence from national governments is a cornerstone of its design, there is growing recognition that housing market dynamics can have significant macroeconomic implications. Proactive macroprudential measures need to be implemented, such as stricter loan-to-value ratios and debt-to-income limits, to curb excessive borrowing during periods of low interest rates.

Integrating financial stability considerations into monetary policy frameworks could help prevent asset bubbles. For instance, the Bank of England’s countercyclical capital buffer has been cited as a successful model for balancing housing market stability with broader economic objectives. 

Ultimately, addressing Europe’s housing affordability crisis will require bold, coordinated action across monetary, fiscal, and housing policies. While central banks can influence affordability through credit conditions, their tools alone are insufficient. A unified strategy, involving national and local governments, is essential to ensure that housing markets serve all citizens, not just the wealthiest few. In this context, the ECB’s independence should not preclude broader cooperation to safeguard financial and housing market stability alongside its price stability mandate.