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Increased mortgage rates, strict income requirements, and the need for substantial equity have cast a shadow over the dream of homeownership in Europe. Many first-time buyers are forced to delay their journey towards owning a home, while established homeowners find themselves compelled to consider alternatives in the rental market. The heightened demand has exacerbated the already strained rental market with record-high rents in several of Europe's capitals. This pressure on the rental market places significant stress on tenants and gives rise to increased inequality and complex societal challenges.
In Norway, the Norwegian Central Bank has raised its policy interest rate multiple times to combat inflation, which has increased mortgage rates. This pattern has manifested throughout Europe, making it increasingly challenging for both established and aspiring homeowners. The significant increase in mortgage rates has forced many to temporarily put their homeownership dreams on hold and resort to the rental market. Meanwhile, several European homeowners have had to leave their own homes and explore options in the rental market due to the growing burden of mortgage payments. This growing influx of middle-class residents into the rental market has added extra pressure on tenants with lower incomes in sought-after locations.
Meanwhile, the costs of housing construction have risen due to inflation, weakening the supply of new homes and making the rental sector the only choice for many. The challenges in the housing market have led to higher demand in the rental market, with ever-increasing competition for available housing.
Additionally, the COVID-19 pandemic has created a new trend where an increasing number of tenants want to live near green areas or by the sea to enhance their quality of life. This has sparked heightened interest in housing within particular cities and neighborhoods, including Rennes and Marseille in France.
The imbalance between supply and demand in the rental market is thus exacerbated, pushing rental prices up across Europe. Especially in several of Europe's employment hubs and tourist hotspots, rental prices have reached record highs. Despite this, these areas are unable to meet the growing demand due to a housing shortage.
"If I were to give a one-word explanation for the problem, it's: supply," said Boris Cournède, head of public economics at the OECD.
According to Paul Tostevin, head of global research at the property firm Savills in the UK, the increasing demand is not solely driven by domestic factors but also by international tenants who come to work and study. Government policies and changes in work trends after the COVID-19 pandemic have led to skilled foreign workers, who can often pay more than locals, flocking to cities like Paris, Dublin, Berlin, and Lisbon. Additionally, international students have returned to cities like London and Amsterdam after the pandemic, leading to an increased need for housing in these cities.
For example, Amsterdam has experienced a significant increase in housing demand in recent years. The city's population has grown significantly due to the expansion of Dutch companies' workforces, as well as the establishment of European headquarters for major international companies like Tesla and Netflix, attracted by favorable tax conditions. Rapid population growth has resulted in a shortage of approximately 200,000 homes, according to a recent report from the Amsterdam city council.
Similarly, global companies like Meta Platforms and Pfizer have established their European headquarters in Dublin due to Ireland's attractive tax incentives. This has led to a 12% increase in Dublin's population over the past decade. These countries' policies have begun to create challenges for housing supply, with companies often pointing to housing as one of the primary challenges in terms of recruiting and retaining employees.
Zurich is also a city experiencing significant pressure on the rental market. Zurich is home to Google's largest research center outside the USA, and the high demand for housing has resulted in a very low vacancy rate for rental apartments, currently standing at 0.07%, with long queues for viewings regularly exceeding 100 people. Walter Angst, co-director of the Zurich Tenants Association, states that demand for rental housing in Zurich may continue rising due to higher interest rates. He predicts that rental prices will experience an increase of approximately 30% by 2025.
In addition to the influx of international workers, the pressure on the rental market in several European countries has been exacerbated in the past year by the arrival of Ukrainian refugees fleeing the war. In Estonia, one of the most popular destinations for Ukrainian refugees, the number of Ukrainians per capita is 41 for every 1000. In the OECD, this is the highest proportion alongside the Czech Republic. The significant increase in the need for housing has contributed to a 22% increase in rental prices in Estonia in 2022, according to Eurostat.
Veronika Saareväli from the Estonian Refugee Council points out the high cost of living and renting in Estonia as a significant challenge for Ukrainian migrants. "Some Ukrainians have been forced to share housing between two families," she notes. Risto Vahi, an analyst at the real estate brokerage firm Uus Maa in Estonia, indicates that tenants in the capital, Tallinn, often experience being compelled to make compromises, move to smaller and cheaper properties, or explore rental options in smaller cities outside the capital when commuting is possible.
The rental market across Europe has thus become increasingly strained in the face of domestic and foreign challenges. Pressure on the rental market has created significant challenges for tenants and led to increased inequality and complex societal issues.
Housing scarcity has made it more challenging for European residents to secure proper shelter. Emily, a 29-year-old artist in London, has to sleep on her sister's sofa during the weekdays. On weekends, she sleeps in a room rented out to others during the week. This way, she can avoid paying over £1000 for a rental property.
Fabian Misbrenner, a 33-year-old doctoral student, had to create his own internet plugin to help him purchase a desirable home after being evicted from his apartment in Berlin and receiving multiple rejections. House hunting in Zurich has also become increasingly difficult, with it becoming standard practice for home seekers to bring recommendation letters, HR contacts, bank statements, and gifts like wine and chocolate when invited to view a property.
The weak housing supply has also resulted in millions of young people having to stay with their parents or live in overcrowded homes, or homes that do not have enough space to provide reasonable living conditions for all household members.
"The shortage of affordable housing has triggered a 'natural selection' process for tenants, hitting young Europeans especially hard," said Sarah Coupechoux, head of Europe at the Abbé Pierre Foundation, a housing charity.
Today's rental market makes financially vulnerable individuals more exposed, particularly young people who likely do not have a stable income. These developments can have lasting socio-economic implications and affect young people's future job prospects, family life, and financial opportunities.
Rodrigo Martinez, assistant professor of real estate at London's Global University, warns that living in hometowns can hinder young people from finding jobs that match their skills and lead to a negative spiral of limited economic opportunities. At the same time, national economies and labor markets may be at risk of stagnation due to a lack of geographical mobility.
In addition, the limited availability of housing has begun to change the composition of several European cities. In Amsterdam, only about 40 percent of the population is Dutch, as more locals choose to move to satellite cities with lower rental prices.
In Portugal, government policies regarding golden visas for property purchases have led to an influx of wealthy foreigners into the capital. This policy has added pressure to the housing and rental market and contributed to a 25 percent increase in rental prices in Lisbon over a year. When locals found themselves priced out of the city center, they protested. After many protests, the government is now planning to end the policy.
Pressure on the rental market also leads to increased inequality when rental costs consume a significant portion of income for those who cannot afford to buy their own homes. The challenges in the rental and housing markets also result in growing inequality between those who receive help from their parents and those who start their journey entirely on their own.
In the face of strong pressure on the rental market, governments struggle to find solutions. However, they often opt for short-term solutions that tend to backfire. Many governments have implemented rent control policies, further hindering the supply side.
For instance, newcomers to Berlin may take several months to find a permanent home due to a 10 percent upper limit on rent increases, causing landlords to refrain from continuing their business. While rent control may benefit long-term renters, newcomers, and lower-income renters are pushed to the outskirts of the city. Moreover, some exploitative landlords can ignore rent control regulations due to a lack of sanctions. High demand has also given significant power to landlords, facilitating discrimination and exploitation. Another example is the Swedish system of rent-controlled apartments, which has resulted in a long waiting list in Stockholm and a subletting market where cases of bribery and sexual harassment are often reported.
To improve the situation in the rental market, supply issues must be addressed. Some countries have adopted various approaches to tackle the housing issue: while Spain emphasizes regulatory changes, Vienna focuses on social support and collaborative housing development. However, inflation and green policies have resulted in rising construction costs. Therefore, the imbalance between supply and demand may persist in the future.
The future European rental market is expected to remain challenging
"Several factors, including rising construction costs, development challenges, and increasing debt costs, continue to contribute to the limited availability of premium inventory and the upward pressure on rental prices," said Tostevin at the Savills real estate firm.
In previous articles, we have explored issues in the Norwegian rental and housing market, which are shared with other European countries as discussed in this article. To help address housing challenges in Norway, we are developing our rent-to-own model, which gives more people the opportunity to realize their dream of owning their own home. Our ambition also extends beyond Norwegian borders. We have recently entered into a strategic partnership with Swedish Navian with the hope of meeting the urgent need for affordable housing in Sweden. We hope that our model will help solve the challenges in the market. At DeleieBolig and Living Impact, we are committed to creating economic stability and reducing social inequalities by offering a sustainable housing solution.
Would you like to explore our rent-to-own solution? Please read more on our How it works page or contact us here.
