The euro zone housing market has already bounced back from its recent slump, and prices are expected to keep rising, which may worsen affordability, the European Central Bank (ECB) warned in an Economic Bulletin article.
House prices dropped in 2022 due to soaring inflation, high energy costs, and rising interest rates, which hit a market that had been thriving in recent years. However, the downturn was shallow, with prices falling just 3% over 18 months—less than during the global financial and sovereign debt crises when prices dropped nearly 5%, the ECB noted. The downturn was also more localized. Only 12 of the 20 euro zone countries saw price declines, and unlike previous downturns that affected peripheral nations, this time Germany was the main driver of the downturn.
Several elements have influenced the recent house price cycle:
Monetary Policy: The ECB's accommodative monetary stance during the pandemic contributed to lower borrowing costs, fueling demand for housing. Subsequent policy normalization led to increased interest rates, dampening demand.
Pandemic Effects: Lockdowns and remote work increased the desirability of larger living spaces, boosting demand in suburban and rural areas. As restrictions eased, this effect diminished, stabilizing demand.
Supply Constraints: Construction bottlenecks and material shortages limited housing supply, exerting upward pressure on prices during the boom phase. These constraints have gradually eased, contributing to price stabilization.
"House prices remain high, negatively impacting housing affordability despite a less restrictive monetary policy," the ECB said.
Given the mix of supply constraints and solid demand, house prices are likely to keep rising, though this trend could be unhealthy for the broader economy, the ECB warned.