The Decisive Eye

European Residential: Unlocking the housing potential

October 10, 2024 | 13 min read
Daniel Tomaselli
Manager, Global Research
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Introduction

Over the last decade, the European residential market has undergone a profound transformation. Housing demand has consistently outstripped supply in most geographies, resulting in widespread affordability and availability problems. Thus, homeownership has become increasingly difficult to obtain for a growing number of households and young adults who are now forced to live with their parents or rent for longer compared with previous generations. This backdrop poses steep challenges for the industry but also creates a unique set of investment opportunities.

We believe that investors should pay keen attention to:

  • Positive fundamentals from long-term structural drivers;
  • Resilient income and cash flow, with weaker correlation to the broader economic cycle; and
  • Strong values enhancing environmental, social, and governance (ESG) portfolio credentials.

Sweet home turned sour

For decades, long-term renting through necessity was uncommon among European households, with limited exceptions. Rising disposable income, favourable social policies, looser planning regulations, and sprawling development projects enabled families to enter the for-purchase market following a short tenure as renters. In England, for example, the percentage of owner-occupied homes rose significantly during the second half of the 20th century, from just over 40% to nearly 70%. Housing became the cornerstone of household wealth, and owning a home was considered a crucial part of achieving financial security. Conversely, renting was viewed as a transient condition, something people had to temporarily endure before they could afford to buy their own home. However, when millennials reached adulthood, they faced a far different economic landscape. For those born after 1980, the path to homeownership has become far more challenging than it was for previous generations. Across Europe, from the large inland metropolitan areas to coastal cities, a significant housing affordability and availability crisis is taking place.

EXHIBIT 1: Affordability worsened for the newer generation of first-time buyers
House price to income ratio(1) for selected European residential markets

1990
2000
2010
2020
2023
Home price to income ratio increasing from 1990 to 2023 in countries such as Belgium, Norway, the UK, and others.

Source: OECD, September 2024

This shift is perhaps most pronounced in Ireland, where the share of owner-occupiers declined sharply, by more than twelve percentage points, from 82% in 2004 to 69% today, according to Ireland’s national statistical institute, CSO. At the same time, the average age at which Irish people became homeowners doubled from 22 to 44 years old. These developments reflect the significant challenges facing younger generations and less affluent families, who must now navigate a housing market that is insufficient to accommodate households today, due to a widening supply-demand deficit. The roots of the problem date back to the mid- 1990s but worsened in the period following the global financial crisis (GFC) of 2008. Since then, Ireland has accumulated a housing deficit of approximately 235,000 homes, equivalent to 11% of the national housing stock, according to a study by Ireland’s Housing Commission. In the best-case scenario, closing this gap is expected to take at least ten years.

EXHIBIT 2: Home price and rent have defied gravity
Ireland’s residential price and rent indexes(2)

Residential Rent Index
Residential Price Index
Consumer Price Index
Ireland's residential rent and price index increasing against the flat consumer price index over same 12 years.

Source: Daft.ie, June 2024

Conclusion

The housing affordability pressure and availability shortfall pose several challenges for decision-makers and households. However, it can also open opportunities for investors with a decisive eye. While long-standing structural and market factors have limited the supply of homes and made ownership increasingly difficult for younger and less affluent households, institutional capital has the potential to play a crucial role in addressing these problems while also reaping the fruits of their contribution. The European residential sector is still relatively young and fragmented. The availability of standing stock with institutional grade may be limited, too. However, it is an asset class that benefits from relatively stable returns, portfolio diversification, and enhanced ESG credentials. With markets beginning to recover, a favourable entry point is emerging. It may be the right time for investors to bring this opportunity home.

Over the last few decades, the European residential market has undergone a remarkable transformation and is still evolving. Download the latest edition for our full perspective.

Footnote

  1. Index, 2015 = 100

    ↩︎

  2. Index, 2012 = 100

    ↩︎
Real estate
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