Forget affordability

“IT is fashionable to claim that much of the rich world is suffering from an affordability crisis. The evidence presented ranges from the high prices of eggs in America and rice in Japan to costly housing just about everywhere. Europe has not been immune to such worries. In May respondents from across the eu told Eurobarometer, an official survey, that tackling inflation should be the European Parliament’s highest priority, making it more important than defence, poverty and jobs.

 

At first glance, Europeans have reason to be concerned about affordability. Economic growth is much faster in America. And unlike its fossil-fuel-rich ally, the old continent saw energy costs soar after misdirected sanctions on cheap Russian energy, as natural gas became much more expensive. Yet even in Europe, complaints about affordability are overstated. After a period of decline, real wages are rising, including for the poorest. In fact, the continent’s problem increasingly seems to be not affordability but availability. In its highly regulated markets, prices cannot adjust to balance demand and supply. Rationing is doing the job instead.

 

Europe’s energy shock has certainly had lasting effects. When the euro area’s inflation rate peaked at 10.6% in October 2022, energy prices alone contributed 3.8 percentage points. Supply-chain problems and consumers’ roaring post-lockdown demand also played a part. Inflation has since subsided, falling to 2.1% in November, but energy and food prices remain far higher than before (see chart 1).

 

The prices most visible to households, in other words, have risen. And when incomes are deflated by such prices, they are lower than in 2021.

 

But affordability is better assessed by looking at people’s ability to buy a wide range of things: clothing, electronics, vehicles and so on, as well as food and energy. Although our calculations suggest that wages in the euro zone, deflated by the harmonised consumer price index, took a 4% hit between mid-2021 and the end of 2022, they have recovered since (see chart 2). By the third quarter of 2025 they were back where they had been before the conflict in Ukraine.

 

Wages of war

 

In many places the pay of the poorest has risen healthily. We calculate that since the first half of 2021 the real minimum wage has jumped by 30% in Poland and 11% in Germany. Fewer households say they cannot afford a holiday than a decade ago. Indeed, the share kept falling in most countries even as inflation surged.

 

What about housing, often cited as a sign of the unaffordability problem? It is true that rents have gone up across the euro zone: they are now rising at an annual rate of 3%, more than twice the average pace of the 2010s. Higher interest rates have made mortgages pricier, too. Nonetheless, as a share of household income, housing costs remain remarkably stable.

 

In Germany, France and Italy, the median household spends 15-20% on housing, much as it did a decade ago. Homeowners with a mortgage pay less than they used to. The share of households paying more than 40% of disposable income on accommodation has, if anything, fallen since 2021.

 

The true difficulty is finding a place at all. In many big cities, including Berlin and Paris, where housing markets are tightly regulated, rents are often far below the market rate. When a flat does become available, it can attract hundreds of applications. The boom in short-term lets for tourists in places such as Amsterdam or Lisbon makes matters worse; more flats cannot be built overnight. Booming Madrid, where rents are also regulated, is attracting immigrants from Latin America at a faster pace than it can build homes for them. Even if Europeans on average are not shelling out more on housing, they may not be living where they would choose.

 

Such an availability problem goes beyond housing. In health care, another regulated market, a doctor’s appointment can be hard to obtain. Some 57% of American patients say they were able to see a specialist in under a month, compared with 35% of French ones. Plumbers may not have time when households need them. European authorities have variously identified shortages of cooks, electricians and nurses. And availability is sure to worsen as Europe’s biggest cohort of workers retires. The continent’s shoppers have more purchasing power than they might think. But with services in short supply, they are likely to become only more disgruntled.” [1]

 

1. Forget affordability. The Economist; London Vol. 458, Iss. 9480,  (Jan 3, 2026): 54, 55.