The Affordability Gap

House prices have outrun incomes across the OECD since 2015. This report shows why the price series cannot identify the cause, applies the one test the credit cycle does offer, and sets out what the supply-side account has to carry as a result.

Two distinct measurements

Affordability refers to at least two different things that behave differently and imply opposite policy. The first is a price series: what a dwelling costs relative to what a household earns. The second is a quantity series: how many dwellings exist relative to how many households need one. Most commentary uses the first and reasons as though it were the second.

The price series is unambiguous. The OECD average price-to-income index reached 114.8 in 2024 against a 2015 base of 100, with Portugal, Canada and the Netherlands each above 130. House prices have grown materially faster than nominal disposable income per head for close to a decade, and advanced economies with mature housing markets saw stronger growth than emerging ones.

Why the price series cannot tell you what caused it

A rising price-to-income ratio is consistent with two stories that call for opposite responses. Cheaper credit bidding for a broadly fixed stock raises the ratio. A constrained stock meeting stable demand raises the ratio. The observable price path is close to identical in both cases, which is why an argument conducted purely on price data cannot resolve.

If two hypotheses predict the same series, the series is not evidence. You have to find a variable on which they disagree.

Evidence from the credit cycle

There is one. Between roughly 2010 and 2022, policy rates across most advanced economies sat at or near their lowest levels in recorded history. Mortgage credit was widely available. Construction finance was cheap by any historical standard. On the demand-side story, that decade is when affordability should have improved: the constraint was the cost of money, and the cost of money fell to almost nothing.

It did not improve. The price-to-income ratio rose through the period in most member countries, and rose fastest in advanced economies where credit was cheapest. House prices started rising gradually after the global financial crisis and the trend accelerated through the pandemic period. Real house price growth peaked in 2022 and has since given back some of the gain, but property prices remain substantially above their pre-2020 level.

A demand-side account has to explain why the most favourable financing environment in modern history coincided with the sharpest deterioration in affordability in modern history. We have not seen one that holds together.

What the supply-side explanation must account for

The supply story has its own burden of proof and it is more tractable, because each candidate constraint is measurable and none of them responds much to the policy rate.

• Construction cost. Materials and site costs have risen faster than general prices. A lower policy rate reduces financing cost, not input cost, and financing is a modest share of delivered cost.
• Skilled trades capacity. The rate at which approved units can physically be built is set by labour that takes years to train. A demand impulse into a fixed build rate produces price, not volume.
• Land use policy. Where planning restricts buildable, serviced land in the locations people want to live, credit expansion bids up a fixed stock.
• Public delivery. The channel that historically served the affordable end has been progressively withdrawn across OECD members since the 1980s, and the private channel that replaced it is least profitable precisely there.

Of those four, only the first is even indirectly affected by monetary policy. That asymmetry is the whole argument.

Where the pressure transfers

House prices have historically grown faster than rents, but as ownership moves out of reach households do not disappear. They rent. That converts an ownership affordability problem into rental demand, and rental demand into rent inflation, which is why rent indices are a better early indicator of affordability stress than house price indices.

This also explains why the problem looks worse to households than the headline price data suggests. The price series measures the cost of a transaction most affected households are no longer attempting.

Evidence required

This report is deliberately incomplete. The argument above establishes that the demand-side account fails a timing test; it does not by itself prove the supply account. What would settle it is a consistent international quantity series: dwellings against household need, measured on a common definition across a wide sample.

If such a series shows the deficit narrowing across the cheap-credit decade, we are wrong. If it shows the deficit widening through that decade, the supply reading is very hard to avoid. We will publish an update when the data exists.

Working implications in the meantime

1. Do not forecast affordability improving as rates fall. Expect the price series to worsen through an easing cycle.
2. Treat construction cost inflation, not mortgage rates, as the binding input for delivered volumes.
3. Rebuild every ratio at metropolitan level before acting on it. National medians conceal dispersion larger than the cross-country spread.

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