The discussion paper was issued by Commission DG Economic and Financial Affairs, the people who monitor Eurozone member states’ adherence to economic governance rules, make individual national policy recommendations and sanction those who don’t comply. This was a field of considerable value to EPF, enabling us to successfully promote policy recommendations on liberalisation of rental markets in the Netherlands and Sweden, size of retail in Denmark and planning reform in Romania.

This discussion paper is not a draft Economic Governance Recommendation to the member states, nor even the start of a discussion. It’s just a piece of research, a review of housing supply and demand drivers and rent regulation, planning and taxation measures impacting housing affordability. Also, as they acknowledge, EU or even Eurozone generalisations are difficult because of vast differences between member states:

  • Housing cycles less synchronised than business cycles in the euro area
  • Wide differences in ratio of household mortgage debt to GDP (20% in Latvia and Lithuania, 100% in Cyprus and the Netherlands)
  • Big variation in ratio of financial assets held by households (80% of GDP in Slovakia, 340% in the Netherlands)
  • Mortgage contracts differ significantly, both in terms of the average LTV ratios (50% in Italy, 90% in the Netherlands) and in terms of their type (fixed versus variable interest rates) and mortgage maturity (15-30 years)

The authors dwell a lot on the increasing difficulty of getting a foot on the property ownership ladder (see Graph 14 “Housing price-to-income ratio change and years of income needed to buy 100m² apartment” and, more clearly,  Graph 16 “Years of income needed to purchase 100 sqm, NUTS-3 regional average, 2019”)

If you consider everything in the paper, it ends up stating the obvious: housing affordability problems are permanent, structural, and influenced by housing policy, rent regulation, taxation and planning, all of which is very political, impacting different interest groups. The paper does show quite well the downsides of any tinkering with any single element of that. It acknowledges that even what the authors prefer – less mortgage interest tax relief, property taxation calibrated so as not to disincentivise energy efficiency investments, a land value tax (“the holy grail (Sic) that eliminates the scope for property to be used to extract economic rent”; not surprising to find Piketty on their reading list) – can cause political and economic problems.

What is interesting is their writing that the EU and member states’ work at prudential control of banks has successfully decoupled house price movements from systemic financial risk but had its own negative impacts on housing affordability:

Most euro area countries have implemented a mixture of macroprudential measures targeting the lenders (countercyclical capital buffer, sectoral capital requirements, risk weights) and/or the borrowers (limits on loan-to-value (LTV) ratios, limits on debt service-

to-income (DSTI) ratio, limits on loan-to-income). … The experience of recent years when house prices significantly outpaced the credit growth may well partly reflect the impact of macroprudential measures.

While macroprudential policy caters for financial stability, it may have more mixed effects on housing affordability. The macroprudential tools are targeted at ensuring financial stability. Namely, the objectives are to prevent excessive credit growth and leverage, excessive maturity mismatch and market illiquidity, direct and indirect exposure concentration, and misaligned incentives. These policies typically reduce demand and act to keep house prices more modest. However, by restricting credit supply, macroprudential tools may have also distributional consequences and impact an access to credit and home ownership affordability, affecting in particular younger debtors with low equity. (pp. 24-25)

Nonetheless, interesting to see that overall, the share of EU household income spent on mortgages has been falling for owners with only some increase in the share of income spent by renters.

Plus a balanced view on rent controls:

Well-functioning rental markets may also significantly contribute to the supply of housing since they foster the liquidity of housing markets and facilitate the labour mobility. (top p. 26)

The regulation of rental markets affects housing market developments, with ambiguous effects on housing affordability. Policy measures include rental price caps either for all or for a subset of renters. Price caps on the private rental market can have short-term appeal in the sense of restricting increases at a time of rental cost pressures. Over the more medium term however, excessive regulation of the rental market can create dual rental markets and reduce the supply of rental properties due to reduced rates of return. Preferential rental contracts [Ndlr social housing] can be beneficial to vulnerable renters, but also act as disincentives to changing their place of living, hampering labour mobility. This effect would be the most pronounced among the low-wage workers. Tight rental market regulations may result in supply demand mismatches which may lead to speculative housing bubbles and excess accumulation of household debt as more households are pushed into home ownership (Kholodilin and Kohl, 2021). These in turn can undermine economic resilience as financial crises can be triggered by unstable housing markets (OECD, 2021). (top p. 27)

Full EPF Secretariat report and text of Commission paper under epf22-44 of 30.09.2022