Access to Housing and Economic Growth in the European Union

Abstract

The European Union is facing what some identify as a housing crisis characterized by rising housing prices and rents and a dearth of affordable housing. Beyond its concerning direct effects on household well-being, the housing crisis may also pose long-term risks to macroeconomic performance. Escalating housing prices and rents can result in resource misallocation and shortages of highly skilled labor in key places, as well as increasing inequality, which could ultimately slow growth. An empirical assessment is conducted to examine the relationship between housing affordability pressures – proxied by the share of housing expenditure in household final consumption – and economic growth in the European Union, using data from 21 member states spanning the period from 2000 to 2019. We estimate a growth regression with country and time fixed effects and alternative inference approaches, and include a comprehensive set of control variables selected from prior literature. In this macro panel, inference is sensitive to the covariance estimator; we therefore report Driscoll-Kraay and country-clustered inference and focus on the sign, magnitude, and robustness of the estimated association. Under Driscoll-Kraay inference, a 10% relative increase (e.g., 20% to 22%) in the housing expenditure share is associated with about 0.3 percentage points lower annual real GDP growth (with similar results for real GDP per capita). These findings are consistent with the view that rising housing cost burdens may weigh on growth, but they should not be interpreted as causal effects.