UK families are among the worst off in Europe when it comes to housing costs, spending more than 40% of their household income on rent, mortgage payments and other living costs, according to the housing charity Shelter.

A report by the charity concludes that the failure of successive British governments to prioritise housing investment has led to one in six people being overburdened with rent, mortgage payments and costs such as utility bills, service charges and tax. The report used data from the European Union Statistics on Income and Living Standards to calculate the percentage of people living in a household where total housing costs (net of housing allowances) exceed 40% of a family's total disposable household income.

It reveals that in France, just 5.2% of the population face such unaffordable costs compared to three times as many in the UK. Of the 29 countries analysed, only families in Denmark and Greece are worse off, making the UK the third most expensive place to live in terms of housing costs. UK families are now worse off than many countries with ailing economies, such as Spain, Italy and Portugal. Cyprus is the cheapest country, with just 2.5% of the population facing unaffordable housing costs, equivalent to one in 40 people.

Shelter said a chronic lack of affordable homes in the UK means the situation is set to get worse. The housing shortage has forced house prices up, which has had the knock-on effect of forcing potential homeowners into the expensive private rental sector.

Just 121,200 homes were built in England in 2010-11, according to government figures. This compares to 132,000 in 2000-01 and around 260,000 in the late-1960s. The 2007 Housing Green Paper set a target of 240,000 new homes a year by 2016, including affordable homes for young families – a target that will not be met, according to a spokeswoman for the Department for Communities and Local Government. She said: "Ministers would argue that target was never going to be reached."

Instead, the spokeswoman said the government had embarked on a number of housing initiatives, such as its new homes bonus, an affordable homes programme, and its first-time buyer schemes.

Shelter chief executive Campbell Robb said: "These figures are the evidence that the UK housing market is deeply dysfunctional. With so many families spending huge amounts of their income on their rent or mortgage, people will be making daily trade-offs between food bills, filling the car tank with petrol, and paying their housing costs."

Families in the UK pay an average £6,760 a year in housing costs alone, with mortgaged homeowners paying £7,436 compared to £8,320 for private renters, according to the 2010-11 English Housing Survey. Tenants in social housing pay an average of £4,108. Energy bills add an average £1,152 a year, figures from the Department of Energy and Climate Change show.

UK energy regulator Ofgem recently forced energy companies to simplify their tariff structures, which resulted in many providers scrapping cheap online tariffs, adding up to 40% to household energy bills. Ofgem also recently announced that a £22bn programme to upgrade the UK's gas and electricity networks will see household bills rise by £7 next year and up to £15 by 2021.

"This is not set to get better any time soon," Robb said. "While the situation is bleak at the moment, a succession of governments failing to provide much-needed affordable homes means that the future facing our children and our children's children is only set to get worse.