Raising housing prices are coming to garner substantial interest from policymakers and the public. In this short piece, I focus on elucidating the key interactions between supply and demand that generate macroeconomic problems and lack of affordability. I make a distinction between short-run and long-run housing supply. The main conclusions are not new: policymakers should be aware of the Tinbergen rule and use multiple tools to address the multiple problems arising from housing markets. I also argue that countercyclical supply-side policies can be particularly damaging. I further advocate for better data-driven mortgage underwriting models that go beyond mark-to-market and try to forecast future equilibrium prices. Finally, I make an argument for a return to ambitious master-planned city-building endeavors in Europe’s most expensive cities. Housing markets have come to occupy a central position in the contemporaneous policy discourse of developed countries. In the past two decades, many of our cities experienced episodes of rapid home value appreciation, oftentimes accompanied by a subsequent correction. In many of the largest and most popular European cities usually political or commercial capitals—these cyclical fluctuations cannot disguise a discernible longer-run trend of substantial housing price inflation. Raising housing prices—which may or may not imply higher user costs and lower affordability—are coming to garner substantial interest from policymakers and the public. Housing is first-order necessity, and as such commands the attention of us all.

The reasons for affordability issues in key European cities can be summarized in four major separate themes. First, increased income inequality and economic stagnation in some countries signify that the purchasing power of low-income households and the middle-class is growing slowly. This is an economic growth problem beyond and above the dynamics of housing markets (Glaeser and Gyourko, 2018). Second, the productivity of the construction sector typically lags that of the economy at large. The costs of building only rise slightly faster than inflation, but are clearly growing relative to other consumer goods. Given the lackluster rates of income growth in many EU countries, this signifies that the share of household expenditures on housing for wide sections of the population may be growing (Albouy et al., 2016). Third, some of the most increasingly popular cities display relatively inelastic housing supplies and not-in-my-backyard (NIMBY) anti real estate development attitudes. Finally, a fourth set of factors relates to capital markets and an environment of low interest rates pushing up real estate valuations. This may not represent a problem for households with access to cheap credit—which may after all be enjoying low mortgage costs. However, it may create an insurmountable barrier for an increasing share of the population after the 2008 crisis who are unable to access credit or do not possess the substantial down payments that are now required to buy a home.