Rising Property Prices: When Will Europe's Cities Become Affordable Again?

The allure of Europe’s capitals and major cities remains undeniable. For decades, people have been drawn to these urban hubs to work in various industries, establish businesses, and seek a better quality of life.

While the central, affluent neighborhoods of Europe’s larger cities have always commanded high prices, areas once inhabited by working-class households have now gentrified. These areas have become home to high-income professionals, effectively pricing out long-term residents who can no longer afford the increased rents.

In several cities, this trend is exacerbated by residential properties being converted into tourist lets and the rising number of digital nomads. These individuals, who move around and work remotely, often earn significantly higher salaries than the local average. As a result, many cities have become unlivable for those who grew up in them. A stark example is found in Portugal, where the monthly minimum wage is €820, yet a 25m² studio apartment in Lisbon can easily cost €700-800 per month, with prices expected to rise even further this year.

This situation is mirrored across Europe. In nearly all countries, even a small one-bedroom apartment is beyond the reach of low-wage earners. On average, renting such an apartment would consume 40 percent of their paycheck. From 2010 to the second quarter of 2023, the EU experienced a significant rise in property values, with housing prices soaring by 46 percent and rents by 21 percent.

A closer look reveals that in the second quarter of 2023, compared to the same period in 2010, housing prices outpaced rent increases in 20 of the 27 EU member states. In all EU countries, as well as in the United Kingdom and Norway, purchase prices have risen since 2013 at rates far above inflation or wage increases. Foreign investment plays a significant role in these price hikes. International investors, primarily from the US and Asia, view European real estate as a secure and profitable investment, particularly in politically stable countries with robust economies. This external demand exerts pressure on housing supply, driving up property prices.

Rental markets, although more regulated with measures like temporary or permanent rent caps in some areas, are not immune to these pressures. Average rents have increased more slowly, roughly aligning with cumulative inflation over the same period. However, this continental average conceals skyrocketing rental prices in certain areas. For instance, in the Spanish city of Valencia, rents have surged by 19.4 percent in the last year alone, with other cities like Málaga and Barcelona seeing increases of over 10 percent in the same period. Italy, France, and particularly Ireland have also witnessed unsustainable price climbs in recent years.

It is important to note that purchase prices will eventually drive average rents higher as investors seeking returns on more expensive properties pass these costs onto renters.

While many European countries have laws prohibiting rent increases under certain conditions or within certain periods, these measures can only slow the process and are often circumvented through aggressive eviction tactics.

Addressing the housing crisis is complicated by the diverse factors influencing demographic and economic shifts across different regions and cities, as well as between different generations and income levels. This diversity makes it challenging for EU or even national legislation to pinpoint issues and provide definitive solutions. In Spain, for example, the tourism industry significantly impacts housing prices. By the end of 2023, the average housing price in 64 tourist towns and 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, housing prices in Spain’s tourist cities rose by 61 percent, while the increase in other areas was 38 percent.

However, Europe’s housing crisis cannot be solely attributed to tourism. In some regions, the problem stems from a simple lack of new homes. In Dublin, young professionals struggle to find housing due to rising property prices and a shortage of affordable options. Many blame high housing prices for Ireland’s current “brain drain” – a mass exodus of young, educated professionals seeking better opportunities abroad.

Increased financing costs, such as mortgage rates and deposits, present another serious challenge to housing affordability. While these costs are ultimately driven by central banks' measures to combat rising inflation, they have a significant impact. Research suggests that larger inheritances will lead to a long-term decline in mortgage signings among Generation Z, but this is little comfort to those currently facing the uphill battle of securing and paying off a mortgage.

Unfortunately, as long as the allure of European capitals remains strong, the trend of rising property values is unlikely to reverse. The magnetic attraction of metropolitan areas not only impacts house prices within cities but also in surrounding regions, thereby widening the economic divide with less dynamic areas. This surge in real estate prices may lead to unequal wealth distribution in the long term, negatively affecting employment and commerce in regions lacking a large urban center.

In major cities like Paris, London, Madrid, and Brussels, as well as in countless medium-sized cities, stagnant wages are pushing lifelong residents away from city centers, who in turn displace other residents even further out. This shift disproportionately affects young households, particularly first-time buyers who find the market increasingly out of reach, and families struggling to find adequately sized homes to meet their needs.

The ongoing changes in real estate markets are dramatically altering the socioeconomic fabric of Europe’s cities, and this trend shows little sign of slowing down.

By fLEXI tEAM