Real estate in the spotlight: Driving growth or empty promises?

Global real estate is worth a staggering $393 trillion. Yet decades of asset speculation and rent-seeking have hampered productivity and contributed to the housing affordability crisis. Housing rights have recently shot up the news agenda: in September, the eviction of Spanish pensioner Maricarmen from her home of 70 years sparked widespread protests and resulted in a snap election. In France, Portugal, and Italy, people have also been taking to the streets over affordable housing and the cost of living. 

Since 2022, the sector has been hit by high interest rates, and investors have been calling for public investment to continue building and retrofitting homes. Yet governments, with their budgets stretched thin, have been increasingly reluctant to invest in the real estate sector. 

To attract public capital, businesses must undergo a major shift away from extractive models that inflate prices and maximise rents towards approaches that create real economic value, jobs, and decarbonisation.

The real estate dichotomy 

Global real estate assets account for approximately two-thirds of global net worth and, in the world’s biggest economies, real assets account for 4.8-8 times national GDP. Rising home prices can be used as collateral for household borrowing, supporting investment and consumption – becoming a key driver of economic growth. Yet in those same countries, a growing number of people cannot afford places to live, and increasing prices worsen the crisis. 

Policymakers face a difficult choice: do they want housing prices to drop, or would this prevent them from meeting economic growth targets?

The supply-led narrative of abundance proposes a simple solution to this tension: it suggests that building more homes can make them more affordable, but the sector as a whole will expand, driving economic growth. However, this approach would accelerate the climate crisis, and growing evidence shows the actual affordability benefits would be marginal at best. But, even putting this to the side, the reality is that more construction just isn’t happening.

The private sector says it’s too expensive to build and calls on the public sector for subsidies and tax breaks. But with demands for public funding at an all-time high, the public sector is increasingly resistant to prioritising construction and real estate. How did we end up here?

A failing sector

Over the last two decades, financial policy in most of the Global North has meant that it’s much easier to secure returns by extracting rents on assets than by producing goods or jobs. As a result, the historical link between the increase in wealth and the growth in economic flows such as GDP has been broken. 

For example, the 1990s liberalisation of the UK mortgage markets shifted investment and lending towards property rather than capital investment or equity in business. According to UCL’s Institute for Innovation and Public Purpose, this is one of the reasons for the UK’s stagnant productivity and low growth levels.

As a result, many global economies now find themselves with huge amounts of wealth and rising costs but low productivity and wage growth – resulting in the well-documented inequality, stagnation and competitiveness crises. To tackle this, policymakers are desperately looking to invest in sectors that can deliver improvements to productivity, affordability and jobs.

The construction and real estate sectors stand out, but for all the wrong reasons. Construction has experienced the greatest productivity decline across all European industrial sectors since 2019. Many of real estate’s widespread practices focus on rent extraction rather than value creation, and they were a major cause of the 2008 global financial crisis. 

This is a human rights issue. The right to adequate housing is recognised in international law, and the UN Guiding Principles (UNGPs) on Business and Human Rights apply to the real estate sector – where they are rarely considered – as much as to consumer-facing sectors like apparel and electronics which are further ahead. Initiatives like the Taskforce on Affordable and Sustainable Housing are working to plug this gap but are in their early days.

For now, given real estate’s track record, it’s hardly surprising that public investment is prioritised in areas like technology and health.

A different way is possible

At the European Investment Bank group forum last year, senior officials clearly called on the sector to stop focusing on wealth extraction and to start focusing on growth creation. 

Some real estate and construction firms have embraced the challenge and, rather than focusing on passive investment strategies which rely on growing land prices, are focusing on approaches where labour creates the added value. 

Inclusio in Belgium converts abandoned buildings into homes that are 25-30% cheaper than market rate. When retrofitting a deprived neighbourhood in Örebro, Sweden, Skanska trained 100 previously unemployed residents so they could work on the project and re-enter the job market and ensured no tenants were displaced. Spanish Grupo Salas is investing in industrialised construction to deliver more affordable housing.

Crucially, these productive approaches often align with decarbonisation. Sufficiency approaches – focusing on renovating or retrofitting existing buildings – create more and better-paid jobs and fewer emissions than demolishing and building afresh, although risks like renoviction and gentrification must be carefully managed. Where new builds are required, industrialised construction approaches can cut emissions, deliver efficiency gains and improve worker safety. These are the approaches that can deliver economic, social and environmental benefits. 

An existential moment

The direction is clear: in order to attract investment, the construction and real estate sectors have to shift from extractive to productive approaches. Economists and policymakers have already implemented reforms to drive this change: from reductions to mortgage interest deductions to tighter rules on rent increases, and there are growing calls for equalising capital gains tax with income tax. 

The real estate and construction sectors have to read the winds: the best way to attract public investment is to create real value for residents, workers, and the climate.