Why Europe’s housebuilding crisis will get worse before it gets better

What do the Germans, French and British have in common? A deepening housing construction problem.

The three largest economies in Europe have been gripped by a steep decline in housebuilding, with a combined housing undersupply of almost 1.6 million homes in the five years between 2018 and 2022.

But if those years were a ‘housing crisis’, the situation is becoming something of a catastrophe. Over the course of 2023 and 2024, JLL predicts a further undersupply totalling 1.1m homes – equivalent to building only 50% of the three countries’ housing need, down from the recent crisis levels of 65% (UK) to 76% (France and Germany).

Of course, the failure to meet housebuilding targets in each of these countries is no secret. So why are things getting worse?

Soaring construction costs are at the root of the problem. Across Europe, materials and labour costs have risen by more than 30% since the Covid pandemic, in excess of inflation over the same period.

Add a steep rise in debt costs, a drop in building permits indicating a slowdown in new activity and the result has simply been too much for an increasing number of businesses. UK construction insolvencies are at their highest rate since the Global Financial Crisis, largely impacting SMEs and modular building companies. In Germany, it has been a similar story, with the pain even spreading to some larger housing developers.

The good news for the medium term is there are signs that construction costs are levelling off, while the rapidly rising debt costs across Europe are widely forecasted to have peaked.

The worse news for the longer term revolves around European construction capacity. 

An additional 2.7 million construction workers are needed across Europe between now and 2030, around half of which are to replace ageing retirees, according to a report from the International Trade Union Confederation. 

The knock-on impact of failing to deliver against housing targets is an exacerbation of housing affordability issues. New home sales have fallen across Europe by circa 25% over the past year. This has created additional pressure on already supply constrained rental markets, fuelling record rises in rental values.

In response to these rising rents, some governments have turned to short-term rental regulation to limit costs to tenants, such as in Scotland. However, the City of Edinburgh has declared a housing emergency, with newly leased homes still seeing double digit growth. Regulation is no substitute for increasing supply and can in fact risk further fresh investment in new housing, exacerbating undersupply problems.

Identifying the problem is a step in the right direction. JLL’s recent Residential Forecasts report highlighted five fundamental issues which have been an ever-present blocker in the UK for new supply. These issues are to some extent just as applicable to France and Germany.

Perhaps the first step in the right direction is a co-ordinated approach. Europe has a shared problem and there needs to be recognition of the social and economic benefit of delivering new housing. Long-term investment is needed and careers in construction should be encouraged.

Ultimately, the only solution is to build our way out of this mess. But it’s going to get worse, before it gets better.