When will European cities become affordable again?

In some cities, this is exacerbated by the renting of homes to tourists and the growing number of digital nomads – people who move around and work remotely, and who typically earn much higher salaries than the local average.

As a result, many cities have become uninhabitable for those who grew up in them. A clear example is Portugal: the minimum wage in the country is €820 per month, but a minimum wage of 25 million2 A studio apartment in Lisbon can easily cost €700-€800 per month, but prices are expected to rise further this year.

The situation is reflected all over Europe. In almost all countries, even a small one-bedroom apartment is out of reach for people on low incomes: on average, renting one costs 40% of their salary.

Foreign investment affects purchasing power

From 2010 to the second quarter of 2023, we saw significant growth in property prices in the EU, with house prices rising by 46% and rents by 21%.

A closer look shows that in the second quarter of 2023, compared to the same period in 2010, house prices exceeded rent increases in 20 out of 27 EU member states. In all EU countries, as well as in the UK and Norway, purchase prices have increased by rates well above inflation or wage increases since 2013.

Foreign investment plays a major role in purchase prices. International investors — mainly from the US and Asia — see European real estate as a safe and profitable investment, especially in politically stable countries with robust economies. This external demand puts pressure on the housing supply, which drives up property prices.

Rental prices

Rental markets are becoming more tightly regulated, with measures such as temporary or permanent rent caps in some areas, making them less directly vulnerable to the vagaries of foreign investment. Average rents have therefore increased more slowly, roughly in line with cumulative inflation over the same period.

However, a broad continental average masks the skyrocketing rents in some areas. In the Spanish city of Valencia, for example, rents have risen by 19.4% in the past year alone, while other cities such as Malaga and Barcelona have seen increases of more than 10% in the same period. Italy, France and, in particular, Ireland have also seen prices rise to unsustainable levels in recent years.

It’s worth bearing in mind that purchase prices will eventually push up average rents, as investors looking for returns on more expensive properties pass the cost on to tenants. Many European countries have laws prohibiting rent increases within certain periods or under certain conditions, but these can only slow the process down and are often circumvented by aggressive eviction tactics.

‘Tourism’

A major obstacle to tackling the housing crisis is that the factors driving demographic and economic shifts vary widely between regions and cities, as well as between generations and income levels. This makes it difficult for EU or even national legislation to identify problems and provide definitive solutions.

In Spain, for example, the tourism sector has a significant impact on house prices. At the end of 2023, the average house price in 64 tourist cities was €2,943/m², compared to €1,689/m² in non-tourist areas.

Between the fourth quarter of 2014 and the fourth quarter of 2023, house prices in Spain’s tourist cities rose by 61%, while in other areas the increase was 38%.

Other factors

However, the housing crisis in Europe cannot be blamed on tourism alone. In some areas, the problem is simply a lack of new homes. In Dublin, young professionals are struggling to find homes due to rising property prices and a lack of affordable options.

Many blame house prices for Ireland’s current ‘brain drain’ – an exodus of young, highly educated professionals leaving the country in search of better opportunities.

When it comes to purchase prices, higher financing costs such as mortgage rates and deposits pose a further serious challenge. While these are ultimately driven by central bank measures to curb rising inflation, they have a huge impact on housing affordability.

My research has shown that larger inheritances will lead to a decline in mortgages among Gen Z in the long term. However, this is not reassuring for those currently struggling to get a mortgage, let alone pay it off.

Do we know if and when it will end?

Unfortunately, as long as the appeal of European capitals remains strong, it is unlikely that rising property prices will reverse.

The attractiveness of metropolitan areas not only affects house prices in the cities themselves, but also in the regions in which these cities are located, widening the economic gap with less dynamic areas.

Rising property prices could eventually lead to an unequal distribution of wealth, which would have a negative impact on employment and trade in regions without a large urban centre.

In major cities like Paris, London, Madrid and Brussels, as well as in many mid-sized cities, stagnant wages are driving people who have lived in a city their whole lives out of city centres. These people in turn are driving other residents even further away from the centre.

This shift disproportionately affects young households, particularly first-time homebuyers for whom the market is becoming increasingly out of reach, and families who struggle to find a home large enough to meet their needs.

The ongoing shifts in the real estate market are dramatically changing the socio-economic structure of European cities, and this shows no sign of slowing down.

• Geoffrey Ditta Ph.D. Professor de Economía en Negocios Internacionales. Director of the Máster Universitario en Internacionalización de Empresas. Facultad de Economía y Empresa, Universidad Nebrija