Europe is facing a double crisis it has yet to solve.

Home prices across Europe have risen 60% and rents 30% over the past 15 years, while the number of building permits has fallen by 20%.

The European Investment Bank estimates that the EU currently needs 2.25 million additional housing units, roughly 50% more than are actually being built.

And yet the buildings that do get constructed remain among the continent’s largest sources of greenhouse gas emissions.

Between 2010 and 2024, construction costs in the European Union rose 56%, and the European Commission expects housing demand to grow by more than two million units per year.

The housing affordability crisis and the climate crisis are not two separate problems. They represent one interconnected systemic failure, and Europe’s construction and real estate sector sits at the center of both.

The Challenge: Three Tensions, One Industry

The Architecture, Engineering, and Construction (AEC) sector has endured four decades of productivity stagnation. Complex permitting regimes, fragmented governance, and an industry structure built around one-off projects have prevented it from delivering affordable, sustainable housing at scale.

By the end of 2025, the supply of new housing in the EU covered only 50% of actual demand, a gap compounded by soaring labor and materials costs, and a construction sector that has historically struggled with low innovation and productivity.

At the same time, buildings account for roughly 40% of Europe’s energy consumption and 36% of its CO2 emissions.

The EU Green Deal, the Circular Economy Action Plan, and the EU Taxonomy for Sustainable Activities all demand deep decarbonization. But as the World Economic Forum’s “Reimagining Real Estate” framework (2024) makes clear, technology and sustainability commitments alone are not enough without a restructuring of who builds, who owns, and who manages the built environment.

An earlier WEF framework on the future of real estate (2021) also warned that affordability and decarbonization would only coexist if the industry radically transformed its business models and governance structures. Neither framework, however, mapped out the specific alternative pathways through which this transformation might actually happen.

France offers an example of how quickly Europe’s housing and climate goals can clash. On April 23, 2026, the government introduced a housing stimulus bill to accelerate construction, decentralize certain decisions, and launch a third urban renewal program. Its most controversial proposal would allow energy-inefficient homes rated F and G to re-enter the rental market, provided owners commit to renovation within three years for single-family homes and five years for apartment buildings. Under current rules, G-rated homes have been barred from new or renewed leases since 2025, with F-rated homes set to follow in 2028. The key question is whether enforcement and financing will make renovation a real outcome.

Across Europe, governments are scrambling to boost supply without undermining climate targets.

Spain has pivoted to industrialized construction, using EU funds to build social housing faster and at lower cost, while also grappling with the problems of short-term tourist rentals and a small social housing stock.

Germany faces the opposite pressure: housing completions fell to their lowest level in 13 years in 2025, while previous estimates placed the annual need at 320,000 units through 2030.

At the EU level, the Affordable Housing Plan now links faster permitting, renovation, and cost-efficient construction. Supply-side measures increasingly hinge on whether governments can align affordability with decarbonization targets.

Four Possible Scenarios for 2040

To address this gap, a strategic foresight study was conducted with more than 30 leading industry experts from across Europe, including architects, builders, materials suppliers, energy companies, and real estate service firms.

Published in the journal Futures, the study developed four coherent scenarios for the European AEC sector through 2040.

The scenarios are not predictions, as researchers Ignat Kulkov and René Rohrbeck write in an article for The Conversation. They are structured explorations of four possible development paths, each with its own distinct logic for how decarbonization, circularity, and housing affordability might interact under different governance arrangements.

In the first scenario, “Giants Take Over,” Big Tech and OEM-style construction companies come to dominate through data-driven, off-site industrialized building. Homes become subscription services, platforms set the standards, and productivity rises sharply. However, affordability and tenant autonomy remain contested, and smaller firms struggle to survive.

In the second, “Circular Future,” a coalition of regulators, financial institutions, and industry pioneers embeds circular economy principles into legislation governing design, procurement, and financing. Buildings become documented material banks, bio-based materials replace concrete, and renovation takes center stage. Progress on carbon and resource targets is significant, but urban affordability challenges go largely unaddressed.

In the third scenario, “Public Sector Leadership,” governments take direct control when market mechanisms fail to deliver at scale. Binding targets, standardized building typologies, and public investment programs drive rapid decarbonization and housing supply, but at the cost of private innovation and creative experimentation.

In the fourth, “Green Energy Revolution,” rapid decarbonization of the electricity grid reshapes the entire housing question. Buildings become active nodes in two-way smart grids, and operational carbon largely disappears. Attention then shifts to embodied carbon, energy poverty, and the distributional effects of a transition that benefits some households far more than others.

A Call to Action

What the analysis makes clear is that there is no automatic alignment between building more homes, decarbonizing the existing stock, and ensuring affordable housing.

The same core tools, including green finance, circular procurement, and digitalization, lead to very different outcomes depending on who coordinates the system and which governance logic prevails.

This has direct implications for policymakers, investors, and industry leaders right now.

Three priorities emerge across all four scenarios. The EU’s first Affordable Housing Plan, launched in late 2025, and the upcoming first EU Housing Summit in 2026 offer a rare policy opening. The question is whether policymakers will use it to address the structural governance failures the scenarios reveal, or simply add more tools to a system whose fundamental tensions remain unresolved.

Deep renovation of the existing building stock is non-negotiable in every pathway; the only question is who pays and who benefits. Digital infrastructure for tracking energy and material performance is essential regardless of which actor is in charge. And the new skills and organizational capabilities needed for industrialized construction and life-cycle thinking must be built now, not once the transition is complete.

The construction industry has a decade and a half to pull it off.

The scenarios exist. From here, the future remains open.