investment is needed to reverse chronic housing shortages

Originally published by PERE Magazine

In the world’s wealthiest nations, a paradox of progress persists: despite soaring GDP and technological innovation, millions grapple with the basic human need for secure, affordable housing. The UK and US, emblematic of this crisis, face a chronic housing shortage rooted in decades of systemic underbuilding, restrictive policies and market failures.

As a consequence, in the US, half of all renters now spend over 30 percent of their income on housing, while in the UK, the average first-time buyer must save for 22 years to afford a deposit – up from just 7 years in the 1990s.  Median US home prices hit $416,000 in 2024, up 45 percent since 2020, while wages grew just 15 percent.

In the US, a staggering 6.5 million-unit deficit leaves families priced out of homeownership and trapped in spiraling rents, following a decade-long undersupply since the 2008 financial crisis. It is even worse in the UK, as the country builds fewer than half the homes needed annually to keep pace with population growth. Since 2000, England’s population grew by 9.3 million, but housing stock increased by just 3.9 million. The UK and US have been among the worst performing when it comes to dwellings per 1,000 inhabitants.

To make things worse, the construction of new buildings is not picking up in either of those countries to solve the chronic shortage of housing. Annually, new builds represent less than 1 percent of the total housing stock count in recent years, according to OECD data. Considering approximately 0.2 percent of the housing would be demolished due to poor maintenance and decay, such building activity can barely keep up with population growth. The UK’s population growth in 2023 was 0.8 percent.

Such a shortage of affordable housing has already encouraged significant private real estate investment in the UK. For example, ACCESS Pool, one of eight pools local government pension schemes in the UK, committed £125 million ($162 million; €148 million) in 2024 to anchor L&G Affordable Housing Fund, a semi-open-end fund managed by L&G Asset Management. LGPS investors also committed £150 million to London-based manager Octopus Investments’ open-end Affordable Housing Fund last year. But such investment, while meaningful, is still a drop in the bucket when it comes to plugging the gap.

Regional disparities and systemic failures

The chronic housing shortage is compounded by stagnant construction rates that fail to meet even basic demographic demands. While national statistics might suggest a narrow gap between supply and demand, this masks stark regional inequities. The crisis is not uniform: it disproportionately punishes those living in high-demand areas where jobs and infrastructure are concentrated, while leaving other regions underutilized.

To illustrate this disparity, we analyzed housing pressure at the local authority level – equivalent to US metropolitan statistical areas. The UK’s average household size of 2.36 residents per home serves as a benchmark; ratios exceeding this indicate strained supply. Alarmingly, over 50 percent of the population in England and Wales resides in areas where the ratio surpasses 3 residents per home.

These figures reveal a system failing on two fronts: underbuilding nationally and misallocating resources regionally. Urban centers like London and Manchester – economic powerhouses driving job growth – face crushing shortages, while peripheral areas lack the incentives or infrastructure to absorb demand.

Among the key factors contributing to the affordable housing crisis in the UK are strict planning permission and restrictive zoning and land-use laws, as well as a dearth of social housing construction in recent years from local authorities amid financial constraints. Social housing construction in the UK hit a 5-year low in 2023, with only 6,000 units built – down from 30,000 annually in the 1970s, according to data from homelessness charity Shelter.

The private sector, meanwhile, is largely disincentivized from equitable construction. Savills data shows profit margins for luxury developers are 20 percent higher than for affordable housing. Just 10 percent of the UK’s 2023 new builds were classified as “affordable,” perpetuating a cycle of exclusion.

Reversing the momentum

To reverse the momentum of chronic housing undersupply would require a whole battery of policy measures, many of which would have strong welfare and wealth implications for a large portion of the population.

Fortunately, we have seen the discussion of housing affordability has become more and more the focal point of political discourse. For instance, the Levelling-Up and Regeneration Act (2023) mandates local housing targets, and the Labour Government is steadfast in pursuing those goals. However, it remains to be seen whether political grandstanding eventually leads to effective change in actual supply.

Progress demands confronting entrenched interests – from NIMBY homeowners to luxury developers – and prioritizing housing as a public good rather than a commodity. Without systemic change, the crisis will deepen inequality, destabilize economies and fracture societies. The choice is clear: build inclusively, or risk a future where the Western promise of social mobility dissolves into permanent housing precarity.