DENIZ IGAN
A newly developed dataset shows how the pandemic’s aftermath ushered in the worst housing affordability crisis in more than a decade.
The pandemic and subsequent return of inflation set off the world’s worst housing affordability crisis in more than a decade. It spilled across some of the largest advanced economies and contributed to widespread anger and resentment about economic conditions.
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, according to a newly developed dataset.
This put housing at the top of households’ list of pressing issues, ahead of health care and education, according to public opinion surveys around the world. It’s a central issue facing policymakers in many countries, given housing’s key role in economic activity. Unlike other assets, housing has a social component, and people often see homeownership as a right of citizenship, even as speculative motives can also drive investment in housing and push up prices.
The affordability crunch reflects higher borrowing costs since central banks jacked up interest rates to counter inflation. At the same time, housing shortages and robust demand amid strong household formation kept prices high. The complex post pandemic economy brought long-simmering structural problems in the global housing market into sharp focus.
Measuring affordability
Housing affordability is a crucial yet subtle concept, especially when it comes to making comparisons among countries with very different housing markets and financing structures. Until now, the most widely used indicators focused on the basic commonsense notion of the relative cost of housing, such as the price-to-income ratio or the share of income spent on housing.
We calculated the index across 40 countries over the past 50 years. What stands out is a sudden deterioration in affordability over the past couple of years. In the US, the world’s largest economy, housing affordability plunged from about 150 in 2021 to the mid-80s by 2024. In the UK, affordability index readings fell from 105 in 2021 to the low 70s in 2024.
Similar declines took place in Austria, Canada, Hungary, Poland, Portugal, Türkiye, and the Baltic countries. This represents a sudden reversal of generally improving affordability over the past several decades. As with resurgent inflation, the dramatic switch in direction had an enormous psychological impact on many households.
How did this happen? During the COVID-19 recession, housing prices surged in many nations. That was a break with past economic downturns, in which housing markets usually weakened. It was because of a mix of demand and supply factors, including lockdown-related constraints on construction. The unexpected rapid increase in house prices prompted concerns about an impending correction.
As central banks around the world started raising interest rates to combat inflation, many observers expected the correction to finally take place. House prices did cool somewhat, but much less than expected, even as mortgage rates surged. To understand what is going on, a look into the evolution of housing affordability over time and its drivers is helpful.
Housing affordability has ebbed and flowed over the past half century. From the 1970s to the mid-1990s, the median affordability index we calculated was below 100, indicating less affordability. 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.
During the global financial crisis, housing prices fell, then slowly recovered as central banks embarked on low-for-long interest rates to stimulate ailing economies. The lower borrowing costs and lower housing prices improved affordability during this period.
*Deniz Igan is head of the world economic studies division at the IMF
