Are rents across Europe too damn high? Over the last decade, rental prices have spiraled upwards in many European countries. In a recent study of 17 European countries, the IMF estimates that a typical renter household spends roughly a quarter of its income in rent, while a young family pays almost one-third. For the poorest in society, the burden of rent is even higher: a household in the bottom 20% of income pays on average 40% of their earnings on rent.
For example, Ana thinks the solution to Europe’s housing crisis is for governments to invest much more in building new social housing. Johan, on the other hand, wonders is rent controls might be part of the solution, whereas Josh thinks an “empty house tax”, where one has to pay higher property tax on a house with no occupants, could be a good idea. Finally, Tobias argues: “The housing crisis is a byproduct of ECB [monetary policy]… The only real solution for the housing crisis is a drastic increase in interest rates for mortgages”.
To get a response to all these comments, we put them to Alfred Kammer, Director of the IMF’s European Department. How would he respond to each question in turn?
We have also been covering this issue on our German-language platform, DebatingEurope/de. We recently held a Citizens’ Panel with a group of young Berlin residents to discuss the rental and housing situation in their city with Christian Gräff, building and housing policy spokesman for the Christian Democrats (CDU) in the Berlin House of Deputies, and Reiner Wild, managing director of the largest Berlin tenant association.
You can see the debate (in German) below:
One of the first questions in the debate was asking why rental prices have been going up. A young resident made the point that, for years now, rents and housing prices in Berlin have been skyrocketing and are becoming unaffordable for normal people. They asked: what are the reasons for this? And can the free market stop this development?
Similar questions are being asked across Europe. To get an Italian perspective, for example, we put this question to Giordana Ferri, Executive Director of Fondazione Housing Sociale, an Italian organisation advocating for social housing. What would she say?
There are many reasons linked to this phenomenon [increased rent and housing prices], of course. Unfortunately, there is a vicious circle of what’s called ‘gentrification’, meaning that there are some city areas that become to sound attractive, firstly to pioneers, and not immediately by market agents. This way these areas start to be attractive and improve their social conditions, which is positive. However, the negative side, is when the market, which does not have rules, prevails and as such, pushes inhabitants away because market prizes increase and consequentially, these areas become less affordable for previous inhabitants.
Social housing can certainly help mitigate this phenomenon [gentrification] because, as I was previously saying, it is also a positive one, as it introduces new elements that can improve monofunctional neighbours, i.e. with population of the same social background. However, of course this phenomenon needs to be regulated. For example, public administrations could regulate this phenomenon, making sure there are still some spaces for rent, especially for people who cannot access the free market and at the same time do not have access to social housing. This can bring value to the neighbourhood because the mixed population will make it more diverse and livelier. For example, during lockdowns we have witnessed that it is not only a problem that people from the same social background live in peripheral areas but also that, once offices and shops are closed, city centre areas become desert. Hence, social diversity is a valuable element for neighbourhoods, including expensive ones. However, housing is not enough. Even if you pay a low rent, you cannot live in an area where supermarket prices are three times higher than those in peripheries. So, there is a need for a good local planning to make sure the neighbourhood evolves well, i.e. becomes safe, affordable and full of services, making sure that as a diverse as possible population can live in the same area.
Another question that came out of our Citizens’ Panel with Berlin residents was the question (again) of rent control. Last year, the city of Berlin introduced a rent cap, but it was ultimately declared void and the German Federal Constitutional Court annulled it. How sensible and effective are rent caps? What alternative solutions are there?
This is a very difficult question. The city of Berlin, as well as Vienna and other European cities, have a tradition of fixing rent caps and control on temporary rent. This news [the one mentioned in the question] has come out in a complex context of rent ceilings which many German and Austrian cities apply. I cannot tell if this the solution, which in any case would be very difficult to apply in Italy, where there is a different approach to private property. Certainly, public intervention is needed but, in my opinion, more for the way cities are designed and built [rather than by only introducing rent ceilings], because once you introduce rent cap, you need to act as strong and intervening government. In parallel, as it’s already happening in Berlin and Austria, we shall work on policies that do not require rent caps because there are natural rent ceiling adjustments within one neighbourhood [thanks to a good balance between being attractive for the market but still affordable].
Finally, our Citizens’ Panel wanted to know about long-term solutions to increase the supply of affordable housing. What can the state and the private sector do to create more affordable housing, for example through building projects?
There is a lot that can be done. There are many examples, also in Italy, of private sector’s work [to create more affordable housing]. Of course, it has to be a private actor willing to accept long-term and limited profit. The private sector can actually do a lot, especially towards affordable housing targeting middle-class. The private-public partnership can significantly help, notably to create economic and financial instruments based on a public-private resource blending, which can target a much larger number of people and their needs. The private sector must be involved. Indeed, almost all European social housing systems are hybrid: the public intervention replies to extreme housing needs with a related rent cup, while the private input becomes much more effective once it’s combined with the public one. In Italy, we look at these [public and private interventions for affordable housing] as two separate processes, but whenever the public and private sectors operate together, which is not yet systemic although we hope it becomes so [in Italy], we get impactful results because we can better balance resources according to needs.
How can European cities make rental housing affordable? Should governments invest much more in social housing? Are rent controls or “empty house taxes” part of the solution? Can the free market solve the problem on its own? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!
Editorially independent content supported by: Fondazione Cariplo. See our FAQ for more details.