Housing Market Developments in the Euro Area: Focus on Housing Affordability

House prices have been at the centre of the public debate recently. After years of sustained increases they accelerated further during the pandemic. The global financial crisis highlighted the impact that housing markets can have on financial stability and the real economy. However, housing market developments also affect housing affordability, which has been deteriorating as income growth did not keep pace with house prices. This paper looks at housing developments in the euro area countries from an affordability perspective, and shows its various dimensions, such as price-to-income, burden of housing cost, household borrowing capacity, but also regional patterns and the impact of affordability on broader economic developments. The paper discusses policy options for addressing high and increasing house prices and the impact these measures have on affordability. The paper documents how housing has evolved across time and countries. The main policy conclusion is that affordability requires policies ssupporting housing supply. While there is a full set of policies that can boost supply of housing, effectively introducing these policies is challenging as they are usually under the control of different actors, often implemented to address other issues and take long to make an impact. In contrast, demand-side policies can be introduced quickly and provide assistance to vulnerable groups. The excess of housing demand over supply gives rise to economic rents for property and land owners, which makes finding a balanced solution more challenging.