## THE HOUSING AFFORDABILITY CRUNCH

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**Canonical URL:** [THE HOUSING AFFORDABILITY CRUNCH](https://www.imf.org/-/media/files/publications/fandd/article/2024/12/igan.pdf)

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### Overview
- The pandemic and the subsequent return of inflation produced the world’s worst housing affordability crisis in more than a decade.
- Affordability fell in the United States, the United Kingdom, Australia, Canada, Germany, Portugal, and Switzerland.
- Housing is less affordable today than during the house price bubble that preceded the global financial crisis of 2007–08, according to a newly developed dataset.
- Public opinion surveys place housing at the top of households’ list of pressing issues, ahead of health care and education.

### Measuring affordability
- A new mortgage-based housing affordability index was developed to better account for mortgage market dynamics and the characteristics of typical housing and household units (Biljanovska, Fu, and Igan 2023).
- The index calculates the ratio of actual household income to the level of income required to qualify for a typical mortgage for a typical house.
- A housing affordability index reading above 100 indicates more affordable housing; lower values signal less affordability.

### Dataset and recent findings
- Coverage: 40 countries over the past 50 years.
- Key recent movements:
  - United States: affordability plunged from about 150 in 2021 to the mid-80s by 2024.
  - United Kingdom: affordability fell from 105 in 2021 to the low 70s in 2024.
  - Similar declines occurred in Austria, Canada, Hungary, Poland, Portugal, Türkiye, and the Baltic countries.
- The postpandemic deterioration represents a sudden reversal of generally improving affordability over the past several decades.

### Drivers of affordability trends
- The index’s time-varying components: nominal mortgage rates, household income, and house prices.
- Historical patterns:
  - From the 1970s to the mid-1990s, the median affordability index was below 100.
  - In the late 1990s, affordability improved, consistently topping 100 before deteriorating in the following decade.
  - After the global financial crisis, housing became more affordable again and remained steady until the aftermath of the pandemic.
- Pandemic period dynamics:
  - During the COVID-19 recession, housing prices surged in many nations, breaking with past downturns when housing markets usually weakened.
  - Central bank rate hikes to combat inflation raised mortgage rates; house prices cooled somewhat but less than expected.

### Limitations and distributional considerations
- The index focuses on prospective mortgage borrowers and does not capture outright ownership without a mortgage or renting.
- The focus on the average household masks differences across the income distribution and generations.
- Affordability tends to be worse and more volatile in emerging markets due to less developed mortgage markets.
- Country-specific examples:
  - Belgium: affordability improved as lower rates balanced moderate house price increases.
  - Canada: affordability declined due to strong house price growth.

### Prospects and quantitative role of rates
- Changes in mortgage rates accounted for just over a quarter of movements in affordability over the half century of the study.
- Lower mortgage interest rates would help but are unlikely to provide much relief given forecasts of higher long-term interest rates than before the pandemic and the potential for renewed demand to push prices up (Banerjee and others 2024).

### Policy recommendations
- Macroeconomic policy:
  - Continue policies that increase the odds of a soft landing.
- Structural reforms to increase housing supply elasticity:
  - Remove or streamline regulatory barriers such as overly burdensome building codes, land use restrictions, and administrative requirements that limit residential construction and rehabilitation.
  - Address instances where regulations exceed what is needed for health and safety.
- Competition and targeted interventions:
  - Break up oligopolies in resources, construction, or sales where lack of competition impedes supply.
  - Consider targeted support for low-income households or those living in informal housing.
  - Offer incentives for developers to provide affordable units (for example, extra development rights).
- Broader challenges:
  - Accelerating climate change (sea level rise, wildfires, extreme weather) and surging migration further stress housing supply and affordability.
- The author calls for a comprehensive plan to restore housing affordability on a sustainable basis.

*Source: Deniz Igan, "The Housing Affordability Crunch," Finance & Development, December 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/12/igan.pdf_