Housing Affordability and Investor-Driven Real Estate
While prices of daily consumables grabbed headlines, a slower-burning contributor to the cost-of-living crisis has been the housing affordability crunch. Well before the pandemic, the cost of housing – whether buying a home or renting – was rising faster than incomes in many places, straining especially younger and lower-income households. The 2010s saw ultra-low interest rates and global capital flows fuel massive increases in home values in the U.S., U.K., and parts of Europe. Then the pandemic housing boom (2020–2021) pushed prices to record highs, even as rents also rebounded sharply after an initial dip. By the early 2020s, housing costs in major cities had reached levels that economists described as “unaffordable with respect to local incomes” – pricing out first-time buyers and leaving renters with burdensome monthly payments. This housing squeeze is a key facet of the cost-of-living crisis because shelter is typically the single largest expense for families. If housing takes a bigger bite of income, less is left for everything else.
Multiple factors have combined to make housing so expensive. Chronic undersupply is one. In the U.K., for instance, new housebuilding has lagged far behind population growth for decades, especially in the high-demand south. Supply constraints (like restrictive zoning laws, limited land release, and slow planning processes) mean too few homes chasing too many would-be buyers or renters. The result: prices sit far above construction costs due to scarcity, as one housing analysis noted of Britain’s situation. A similar story unfolded in the U.S., where after the 2008 housing crash, construction of entry-level homes plunged and never fully recovered – so by 2020, the U.S. was short an estimated 4 million homes relative to demand. In the EU, countries like Germany and the Netherlands have faced housing shortages in growing cities, driving up rents and prices.
Yet this isn’t just about building enough; it’s also about the financialization of housing – housing treated as an investment asset. Years of easy monetary policy made real estate attractive to investors seeking returns. Low interest rates meant cheap mortgages, which allowed buyers to bid up prices. It also encouraged leveraged investment in property. In many cities, investors (from mom-and-pop landlords to large institutions) have bought homes not primarily to live in but to rent or hold for capital gain. In the U.S., investor purchases of homes spiked in the 2020–2022 period; by early 2025 investors accounted for about 26.8% of all home sales nationwide, the highest in five years. Certain markets saw even heavier investor presence – for example, one in five homes in California is now investor-owned, and in some counties over half of homes are in investors’ hands. The U.K. likewise has around one in five homes owned by private landlords (buy-to-let investors). This trend, as a UCL report highlights, has created a “housing-finance feedback cycle” where rising prices beget speculative demand, which in turn pushes prices higher.
The consequences of investor-driven markets are debated. On one hand, proponents argue investors add rental supply and liquidity. On the other hand, evidence suggests that when investors (especially large firms) compete with families to buy homes, they drive up prices beyond what local incomes support. Investors often have cash or easier financing, outbidding regular buyers – “existing homeowners easily outcompete first-time buyers,” as researchers put it. This pricing-out effect has dramatic social implications. In Britain, for example, homeownership among young adults has collapsed: Millennials today are only half as likely to own a home by age 30 as Baby Boomers were at the same age. Many more people are stuck renting, and the private rental sector doubled from 10% to 20% of households in the U.K. over two decades. Similar declines in youth homeownership are seen in the U.S., where the median first-time buyer age has climbed above 35 for the first time. The inequality effects are stark – those who owned property going into this period have seen their wealth swell, while those who didn’t face higher barriers than ever to get on the housing ladder.
The pandemic poured fuel on the housing fire. Ultra-low mortgage rates (some below 3%) combined with remote work and stimulus savings led to a buying frenzy in 2020–2021. Home prices in the U.S. jumped about 40% in just two years. The U.K. and many EU countries saw 15–30% jumps in house prices over a similar span. In the U.S., the median home price hit over $400,000 for the first time, while U.K. prices exceeded 8 times the average income in parts of England. This created a housing affordability crisis: by 2022 the typical mortgage payment for a new U.S. buyer was almost double what it was in 2019, when accounting for both price and interest changes. The share of income needed for a first-time buyer mortgage hit multidecade highs. In the U.K., rent and mortgage costs as a fraction of take-home pay reached burdensome levels (e.g. renting a one-bed flat in London often costs 50% of a young worker’s net income).
Another aspect has been the role of institutional investors – pension funds, private equity, REITs – moving into residential real estate. In the U.S., mega-landlords have bought up single-family homes in Sunbelt states to rent out, and in Germany or Spain, global funds acquired large swaths of apartments. This has sometimes led to controversy and pushback (like Berlin’s 2021 referendum to potentially expropriate large landlords). The Guardian reported that in California, while the state’s investor home ownership rate (~19%) is moderate, some areas like vacation destinations have extremely high investor shares (over 80%), driving locals out of the market. “What happens if you build more housing, and institutional investors are buying up 20% of the new stock? It’s a never-ending cycle,” one researcher warned, arguing that speculative demand must be curbed alongside boosting supply.
All this means that for many households, housing costs have outpaced paychecks, contributing to the feeling of a cost-of-living squeeze. Renters face the immediate pain: in the U.S., asking rents rose over 10–15% in 2021–22 in many cities, far above wage growth, and although rent inflation slowed in 2023, it left rents at a permanently higher plateau. In the U.K., average rent reached record highs each consecutive quarter through 2023, and low-income renters frequently pay well over 40% of their income on rent. Rent burdens translate to less money for food, healthcare, or savings. Meanwhile, would-be homeowners stretch to breaking points (or give up entirely). In 2022, the number of U.S. first-time homebuyers fell to a generational low, with younger families increasingly locked out of ownership. Those who did buy often had to take on large debts: the mortgage debt-to-income ratios are at or near record highs for new buyers in many locales.
To sum up, housing has been a slow-burning affordability crisis exacerbated by recent events. The cost-of-living crisis is most acute for daily essentials like food and energy, but behind that is the reality that shelter costs are eating up incomes like never before. This is not just a cyclical issue but a structural one: decades of policy have favored housing as an investment (through tax breaks, credit liberalization, etc.) over housing as shelter. In the U.K., analysts note that since the 1980s, government policies (from mortgage credit deregulation to tax treatment) have turbo-charged this “financialization” of housing, resulting in real house prices increasing five-fold and younger generations increasingly shut out. In response, some experts are calling for bold reforms: stricter regulation of buy-to-let and short-term rentals, new property taxes or land taxes to disincentivize speculation, massive public housing investment, and stronger tenant protections. Such measures aim to break the cycle where housing costs keep rising faster than earnings.
For now, though, housing remains a large piece of the cost-of-living puzzle. It particularly affects certain demographics – younger adults, families with children in need of space, and people living in high-cost metropolitan areas. This contributes to generational and regional divides in how the cost-of-living crisis is experienced. A retired homeowner with a paid-off mortgage may feel the pinch of food and energy inflation, but a 30-something renter feels that plus steep rent and the impossibility of buying a home – a much more precarious position. Next, we’ll turn to other critical expenses beyond housing that have been rising persistently and squeezing households: namely, the costs of healthcare, education, and childcare.