What is a dream for investors is a nightmare for citizens who want to buy a home for themselves: this is a brief summary of the trends in the European housing market in recent years. In the EU-27, house prices rose by an average of almost 40% between 2015 and 2021, and while this varies considerably from country to country, it was very rare for prices to fall in nominal terms.

Various factors are having an impact on house prices across Europe and as Investigate Europe’s new investigation ‘Untaxed’ shows, favourable taxation policies given to the real estate sector are playing a part in the changing housing dynamics.

“There is no question that house prices are inflated by these tax reliefs,” John Christensen, co-founder of the Tax Justice Network says. “Property developers benefit from tax reliefs which serve little or no economic  purpose, and in many cases international investors hold property as an investment class to benefit from tax exemptions.”

---

---

Rents have risen more modestly, by just 8 percentage points over the same period. This is almost equal to the cumulative inflation over the period. In other words, although rents are rising on average across the EU, they are still the same in real terms as in 2015.

The rental sector is inelastic, with prices tracking house price growth more slowly. But they do so over the long term, so another significant increase can be expected soon. However, house prices have soared in recent years, in no small part due to a change in investor attitudes. Residential property is increasingly being seen as an investment asset class.

House prices are on a sharp rise

Compared with 2010, nominal house prices have fallen in only three southern Member States: Italy, Spain and Cyprus. In all other EU countries, and also in the UK and in Norway, house prices rose from 2010 at rates that were higher than inflation or average wage growth.

---

---

In Estonia, house prices have risen almost 2.5 times in a decade. And in Hungary, Luxembourg, Latvia, and Austria they have at least doubled.

Germany and Scandinavia have also seen significant increases. Moreover, in these countries, disposable incomes have not increased as significantly over this period as in, say, Hungary or Estonia. This means that the relatively smaller increase in house prices has been more noticeable.

Decades of saving

In its housing market report published at the end of November, the Hungarian National Bank presented a telling chart of what these house prices mean. The graph shows how many years of saving the average wage in a given country (the calculation assumes all of a yearly salary is used for the purchase) is needed to buy a 75m2 apartment in the capital at an average price per square metre.

---

---

The differences are significant: in Prague, Bratislava and Paris, it would take more than 20 years on average wages to save for a flat. In Oslo and Rome about 10 yrs, and in Dublin, Brussels and Nicosia less than 10 years. Of course, even in the latter cases, this is clearly not an option without taking out a loan or selling an inherited home.

The figures are for the third quarter of 2022. Compared with a year earlier, the time it takes to save for a home on average wages has fallen in only six of the 28 capitals surveyed.

Looking at longer time series, this increase is significant: according to data published earlier by the Hungarian National Bank, in Budapest, it took 6.3 years to save the total average wage for a second-hand dwelling in 2012 and 9.2 years for a new dwelling. By the end of 2022 it would take 18 years.

The long shadow of the Iron Curtain

Across EU countries, the percentage of the population who own their home and the percentage of those who rent varies widely. In the former socialist countries, the share of owners is around 90% or more, while in the western and northern countries it is lower. The big exception are the German-speaking countries – Germany, Austria and Switzerland – plus Denmark, where it is as common – or almost as common – to rent as it is to own.

---

---

So house price growth means very different things in, say, Romania, or Germany. But it is true everywhere that it is becoming harder to become a homeowner. In this respect, the Eastern countries are still in a better position, if you consider that it is easier to become an owner there if you inherit. However, the West and the North have higher indebtedness rates, according to the European Central Bank, and lower base rates, which means that people in these countries are more likely to buy more, on better terms, and with better credit.

Rent increases are not that bad… yet

However, many people do not inherit housing wealth and either cannot or do not want to take a loan for this purpose. They are the ones who are forced to enter the rental market. In addition to those who, by their own choice, rent rather than buy.

---

---

A country-by-country breakdown also shows that rent growth is lagging far behind house price growth. In Ireland, Hungary, Lithuania, and Estonia, rents have increased significantly, by around 30%, but monthly disposable income has increased more than this in all four countries, making housing more affordable on average despite the increase in price.

Yet this does not mean that the situation is improving. There is a consensus in the international literature that monthly rents are generally in line with 5% to 7% of the house price. However, this is a long term rate, and rental prices have not yet followed the dramatic price increases of recent years. Though, it is only a matter of time.

…but are still a problem for millions

Eurostat does not collect data on tenants’ incomes, but national databases show that landlords, not surprisingly, tend to earn more than tenants. So it does not say much that rents have become more affordable on average. Nor does day-to-day experience show this, precisely because people who have not seen their incomes grow as fast in recent times tend to live in rented accommodation. This is also reflected in the overburden rate.

This rate shows the percentage of people who spend at least 40% of their money on housing. In 2021, 50% of market renters in the EU-27 were in this group, compared to only 11.5% of owners who were not repaying their loans. Greece had the worst situation for renters, with 96.6% spending at least 40% of their money on housing, and the Netherlands had a share of overburdened renters above 80%.

And, of course, there are also significant differences by income group. A third of the EU’s lowest 20% of earners are overburdened, compared with just 0.6% of the richest 20%.

Good luck if you have an average wage but no flat!

Every year the EU’s statistics agency Eurostat and the International Service for Remunerations and Pensions (SIRP) publish a booklet on average rents in capital cities. In it, they average market prices that represent the top end of the rental market: they monitor central, well-located flats, built or renovated in the last 10 years. In other words, the average prices obtained here are higher than the average prices in the given city. The differences are nevertheless striking.

---

---

In virtually all countries, one-bedroom rentals are unaffordable from a median wage. In Brussels and Nicosia, you would have to spend 41% of the median wage for a one-bedroom apartment. This means that even in the most affordable cities, anyone earning the average and wanting to rent such an apartment is automatically overburdened.

And in Athens, Lisbon, Bucharest, and Zagreb, people would have to spend more than their annual income on rent. So in these cities, it is simply impossible for someone on average earnings to rent a better located, newer one-bedroom apartment on their own.

However, Eurostat and numbeo.com data suggest that the same ratio can be calculated for non-central one-room rentals. The situation is looking better, but you still see high figures in some cities.

---

---

In Warsaw and Lisbon, it costs 63% of the average salary to rent a one-bedroom apartment at an average price, in Prague and Bratislava 55%, and in Budapest almost half. Only in Vienna is this rate below 25%. And that’s just including the rent.

Graphics: Marta Portocarrero