Covid-19 will worsen housing affordability, report warns

Rating agency Moody’s says pandemic will prompt greater demand for social housing

Housing affordability across Europe will worsen for young and low-income groups after Covid-19, Moody's has warned.

The rating agency says the pandemic will speed up “fundamental shifts” in the European housing market, with affordability declining despite falling house prices.

The lack of affordability will also lead to greater demand for social housing and rental market regulation, it says, and a shift in housing preferences away from urban areas to smaller cities and suburbs.

Hospital Report

In a report on the European housing market, Moody’s said Covid-19 has triggered a severe economic downturn in Europe, with economic activity contracting “on an unprecedented scale and unemployment rising”.


While European house prices have remained relatively stable to date because of policy support, it expects “prices will fall in most European countries in the aftermath of the pandemic”.

It noted that “recessions have historically reduced housing demand because of lower disposable income, job losses and uncertain sentiment”.

The agency expects house prices to decline in 2021 before recovering again in 2022 on the back of a wider post-crisis economic rebound.

The extent of price declines will depend on supply and demand dynamics in specific markets.

“Risks will be highest for southern European countries with relatively high dependence on industries such as tourism, as well as the UK, where Brexit is compounding Covid-19-related house-price pressures,” it said.

Access to finance

While house prices will decline, there will be a simultaneous reduction in household earnings and a reduced access to finance, it said, noting that the young and those on low-income are more likely to lose jobs and income as a result of the economic fallout from Covid-19.

“Even before the pandemic, housing affordability was worsening in Europe, with home purchase deposit requirements becoming increasingly challenging for low-income buyers, given prevailing house-price-to-income ratios,” Moody’s said.

“The economic effects of the pandemic will exacerbate this issue, particularly for young and low-income home buyers, because reduced incomes and lower debt availability will outweigh declining house prices,” it said.

In Paris, it said the average home buyer needed about 23 times the average annual disposable income to purchase a 70sq m property in 2019, compared with 11 times in Madrid.

Dublin had the third-highest ratio, behind Paris and Amsterdam, with home buyers needing 17 times the average annual disposable income to purchase a basic living unit.

As incomes decline amid the economic downturn in Europe and temporary government wage support schemes taper off, it warned that renting will become less affordable for many households.

This will lead to an increase in demand for social housing in the aftermath of Covid-19.

Fiscal pressures

However, fiscal pressures at a government level will limit capacity to extend temporary income support schemes or fund new social housing above what is already planned. As a result, the supply of social housing will not keep pace with increased demand, which will exacerbate social housing shortages, it said.

“Arrears may increase for housing associations and local governments in the short term as rental affordability declines,” Moody’s said.

The report said European governments may increasingly turn to regulation to support tenants in the aftermath of the pandemic, as some did after the 2008 financial crisis.

It cited Ireland as one of the countries that had introduced rent controls in the face of greater pressure on the rental market.

Another trend accelerated by the crisis has been remote working “and the decrease in affordability among workers employed in the most affected sectors will accelerate a shift in demand for housing away from densely populated urban areas in Europe and toward smaller cities and suburbs”, it said.

House prices in the Republic fell by almost 1 per cent in the 12 months to September as the crisis dampened activity in the Irish market. Prices were down by 1.8 per cent in Dublin. However, a significant pick-up in transactions in September was seen as evidence of recovery.

In its report, Moody’s also warns that falling house prices will increase non-performing loans and therefore pose a credit risk for banks.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times