Locked Out: Drivers and Economic Implications of Declining Housing Affordability in Europe

Amid sharp house price increases in some parts of Europe, housing affordability has again become one of the main concern of households. This paper conducts three complementary sets of analyses to shed light on the drivers and economic implications of declining housing affordability. First, using a structural VAR, we show that supply-side factors have become increasingly prominent drivers of house prices—a notable shift from the credit-driven price increases that preceded the Global Financial Crisis. Second, drawing on household-level EU-SILC data, we argue that the burden has fallen disproportionately on lower-income urban renters, who face both rising rents and diminishing prospects of transitioning to homeownership. This is especially true for financially more vulnerable renters who have seen their probability of becoming home owners fall by more than half since the pre-GFC period. Third, we provide new empirical evidence that the resulting widening of income and wealth gaps between owners and renters is compounded by the efficiency cost of reduced labor mobility, as high housing costs make it harder for workers to move to more productive locations – quantitively, housing affordability constraints might have led to around one million foregone moves within the EU over the past decade. The analyses underpin the policy recommendations to alleviate housing affordability challenges set out in the IMF’s 2026 Euro Area consultation, including the need to focus on national measures to boost housing supply, with a complementary role for EU-level action.