Luigi Capoani and Chiara Moriconi / Oct 2026
Image: Shutterstock
Europe’s housing problem is not only that homes have become less affordable. It is also that a very large share of household wealth is tied to an asset whose supply often adjusts slowly and whose purchase is commonly financed through bank credit. This makes housing more than a private investment choice: where capital flows and what it ultimately finances can affect asset prices, investment and the broader economy.
Housing occupies a distinctive place in this relationship. When a bank grants a mortgage, it creates both a loan on its balance sheet and a corresponding deposit, expanding the stock of bank money. As the European Central Bank explains, that money is extinguished as the loan principal is repaid. This does not mean that banks create real wealth from nothing: borrowers take on long-term liabilities, while the property typically serves as collateral. Housing therefore links credit creation directly to real assets.
The scale of that link is especially striking in Europe. An ECIPE comparison based on OECD data estimates that around 71 percent of EU household assets are held in real estate, compared with roughly 39 percent in the United States. OECD evidence also shows that the main residence alone accounts for around half of household wealth on average across the countries for which comparable data are available. The key question, then, is not simply how much capital flows into property, but what that capital produces.
The crucial issue is whether the market can expand supply quickly enough. Evidence reviewed by the OECD suggests that where supply is elastic, easier credit is more likely to be accompanied by an increase in available housing and more contained house-price growth. Where regulatory or geographical constraints limit construction, additional purchasing power is more likely to be reflected in higher prices than in additional supply.
This distinction changes how housing finance should be understood. Funding new construction can increase the number of available dwellings, while renovation and energy-efficiency investment can improve the quality, durability and performance of existing buildings. By contrast, financing transactions in existing properties does not in itself expand supply. The point is not that one form of credit automatically pushes up house prices while another does not, but that its effects depend partly on whether finance is accompanied by an expansion or improvement of real housing capital.
Recent European evidence makes this contrast even clearer. IMF analysis shows that before the global financial crisis, rising house prices were closely associated with credit growth and favourable financing conditions. Today, however, supply-side shocks play a much larger role in driving real house prices. Construction activity remains subdued, while labour shortages and financial constraints have increasingly limited the sector’s ability to respond.
The policy implication is therefore not that mortgage lending should simply be restricted, but that its destination matters. This is particularly relevant given the condition of Europe’s building stock: it accounts for around 40 percent of EU energy consumption, while roughly three quarters of buildings have poor energy performance. Renovation and energy-efficiency investment can therefore improve the quality and performance of existing properties while creating tangible economic value.
EU policy is beginning to reflect this logic. The European Affordable Housing Plan combines measures to boost supply through new construction and renovation with efforts to mobilise public and private investment. The IMF similarly calls for policies that expand construction capacity, improve developers’ access to finance and address bottlenecks in the building sector.
More housing finance is not necessarily better housing finance. Where supply is constrained, additional purchasing power can push up property prices without solving the underlying shortage. Linking finance more closely to construction, renovation and energy efficiency can instead help turn capital into greater housing availability, higher-quality buildings, stronger resilience and long-term economic growth.
