The solution to Europe’s housing affordability crisis must include building decarbonisation

Introduction – Resource Context

The analysis titled “The solution to Europe’s housing affordability crisis must include building decarbonisation” is published by Bruegel, a Brussels‑based economic think‑tank. The author, Ugnė Keliauskaitė, is a research analyst in Energy and Climate at Bruegel with a background in environmental economics from LSE and previous experience in public‑sector finance. The paper examines how decarbonising residential buildings can alleviate the growing housing affordability problem across the EU.

Housing Affordability – Current Challenges

EU housing costs have risen roughly 30 % since 2010, while real household incomes increased only 20 %. The European Commission measures affordability through the “overburden rate,” flagging households that spend more than 40 % of disposable income on housing. Lack of a unified definition of affordable housing across member states complicates policy coordination.

Energy Costs – Impact on Affordability

High heating and cooling expenses, driven by poorly insulated, fossil‑fuel‑dependent dwellings, exacerbate unaffordability. Energy bills represent about 5 % of expenditures for low‑income families and 9 % for middle‑income families, with rural households in Poland spending twice as much on heating as urban ones. Insulation can cut bills by 15‑60 %, while heat pumps use three to five times less energy than gas boilers and can reduce energy use by 60‑70 % (up to 90 % when combined with good insulation).

Financing Gaps – Public and Private Resources

The EU Social Climate Fund (SCF) and the Emissions Trading System for Buildings and Transport (ETS‑2) are earmarked for decarbonisation schemes. The Recovery and Resilience Facility has allocated €81 billion for building decarbonisation, but it expires in 2026, risking a funding gap. ETS‑2 revenues are projected at €342‑570 billion (2027‑2032), with €87 billion slated for the SCF. However, only Latvia and Sweden have submitted national Social Climate Plans, threatening delayed disbursement beyond January 2026. An estimated €150 billion per year of investment is needed up to 2030 to meet renovation targets.

Renovation Progress – Slow Adoption

Between 2016 and 2020, only 1 % of EU buildings were renovated annually; deep retrofits (≥60 % primary‑energy reduction) occurred in just 0.2 % of residential buildings per year. Only a quarter of buildings are electrified for heating and cooling. The Commission aims for 60 million heat‑pump installations by 2030, yet sales have slowed, with German installations halving in 2024 and French sales falling 25 %.

Policy Landscape – EU Directives and Instruments

EU directives set targets for energy savings, protect vulnerable households from energy poverty, and require primary‑energy reductions in residential buildings. Funding instruments include the RRF, ETS‑2, SCF, and cohesion funds. Policy proposals stress grants for the worst‑performing homes, green loans, pay‑as‑you‑save schemes, and social leasing to lower upfront costs and spread repayment over energy savings.

Regional Differences – Tailored Approaches Needed

Building stock, tenure, and heating systems vary widely. Central and Eastern European countries have high home‑ownership rates (>80 %), making private investment crucial, while rental‑heavy markets like Germany and Austria need regulations that link subsidies to rent affordability. Rural detached houses may benefit from rooftop solar, whereas large apartment blocks require collective financing mechanisms.

Split‑Incentive Problem – Landlords vs. Tenants

Landlords typically bear renovation costs while tenants pay energy bills, creating a disincentive for energy upgrades. Aligning subsidies, tax incentives, and rent controls can mitigate this split‑incentive and encourage broader adoption of heat pumps and insulation.

Outlook – Integrating Decarbonisation into Housing Policy

The forthcoming EU Affordable Housing Plan offers an opportunity to embed building decarbonisation within the broader affordability strategy. By coordinating funding, standards, and tools at the EU level while allowing national flexibility, the plan can address both cost burdens and climate goals, ensuring sustainable, affordable housing for Europeans.