The Housing Affordability Crunch

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The pandemic’s aftermath produced the worst housing affordability crisis in more than a decade.
Affordability fell in the United States, the United Kingdom, Australia, Canada, Germany, Portugal, and Switzerland.
On average across countries, housing is less affordable today than during the house price bubble that preceded the global financial crisis of 2007–08.
Housing rose to the top of households’ list of pressing issues, ahead of health care and education (Romei and Fleming 2024).

New cross-country dataset uses a mortgage-based indicator of housing affordability (Biljanovska, Fu, and Igan 2023).
The housing affordability index = ratio of actual household income to the level of income required to qualify for a typical mortgage.
Interpretation: an index reading above 100 indicates more affordable housing; lower values signal less affordability.
Dataset covers 40 countries over the past 50 years.

United States: affordability plunged from about 150 in 2021 to the mid-80s by 2024.
United Kingdom: index readings fell from 105 in 2021 to the low 70s in 2024.
Similar declines observed in Austria, Canada, Hungary, Poland, Portugal, Türkiye, and the Baltic countries.
Historical pattern: median affordability index was below 100 from the 1970s to the mid-1990s; improved in the late 1990s, topped 100 before deteriorating in the following decade; improved after the global financial crisis and remained steady until the pandemic.
Drivers of the index: nominal mortgage rates, household income, and house prices.
Over the half century of the study, changes in mortgage rates accounted for just over a quarter of movements in affordability.

During the COVID-19 recession, housing prices surged in many nations (Ahir and others 2022) instead of weakening as in past downturns.
Contributing factors: lockdown-related construction constraints, robust demand, strong household formation.
Central banks raised interest rates to combat inflation; mortgage rates surged.
House prices cooled only somewhat despite higher mortgage rates, leaving affordability deeply impaired.
Psychological impact: the dramatic reversal from improving affordability to sharp deterioration produced large household anxiety.

The index focuses on prospective homeowners financing purchases with mortgages; it does not capture:
- Outright ownership without a mortgage.
- Renting affordability.
- Distributional differences across the income distribution and generations.
Affordability is worse and more volatile in emerging markets, reflecting less developed mortgage markets.
Country-specific example contrasts:
- Belgium: affordability improved as lower rates balanced moderate house price increases.
- Canada: affordability declined due to strong house price growth.

Lower mortgage interest rates would help but are unlikely to provide much relief given:
- Most forecasts predict higher long-term interest rates than before the pandemic.
- As rates decline, demand could rise and push up prices (Banerjee and others 2024).
Mortgage-rate changes explain a bit over a quarter of historical affordability movements, limiting the effect of monetary easing alone.
Restoring affordability without a sharp drop in house prices is uncertain.

Macroeconomic policy:
- Continue efforts to achieve a soft landing to reduce downside risks to affordability.
Structural and supply-side reforms:
- Remove regulatory barriers to improve the elasticity of housing supply (building codes, land use restrictions, administrative requirements).
- Ensure regulations mitigate negative externalities and maintain quality without becoming overly burdensome.
- Address lack of competition in resources, construction, or sales; consider breaking up oligopolies where necessary.
Targeted interventions:
- Provide targeted support for low-income households or those living in informal housing.
- Offer incentives for developers to provide affordable units, for instance in the form of extra development rights.
Broader considerations:
- Account for accelerating climate change effects (sea level rise, wildfires, extreme weather) that threaten housing supply.
- Prepare for surging migration pressures on shelter and affordability.
Emphasis: policymakers should pursue a comprehensive plan to restore affordability on a sustainable basis.

Source: The Housing Affordability Crunch, Deniz Igan, December 2024.

The Housing Affordability Crunch
- The Housing Affordability Crunch (Markdown version)
- The Housing Affordability Crunch (PDF)