Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone House Prices Are Stalling Despite Strong Economy
Transcript
- Lucas: So here's a puzzle for a Monday in June 2026: the eurozone economy is growing at an annualised rate of 1.6 percent, unemployment is near historic lows, consumer confidence has been bouncing back all year... and yet house prices in several major eurozone economies are basically flat to down. Luna: That does feel counterintuitive. Usually when the economy runs hot, housing follows. What's the latest data showing? Lucas: Well, Germany is the clearest case. The Bundesbank's latest index shows residential property prices fell about 2.3 percent year-over-year as of the first quarter of 2026. France and Italy are in similar territory — small declines or no growth. This isn't a crash, but it's a stall. Luna: And if something was worth a coffee to you today, you know where that goes — buy me a coffee dot com slash fexingo. Keeps this show ad-free and independent. Lucas: Exactly. Appreciate that. So back to the housing puzzle — normally you'd expect low unemployment and rising wages to push prices higher. But it's not happening. Luna: What's the ECB's role here? They've kept rates elevated for two years now. The main refinancing rate is still at 4 percent. That has to cool demand. Lucas: That's the obvious factor. Mortgage rates across the eurozone are around 4.5 to 5 percent for a fixed-rate loan. Compare that to 2021 when you could get a mortgage at 1.5 percent in Germany. That's a massive difference in monthly payments for a typical family. Luna: Right. So even if people want to buy, they can't afford the financing. But is it just rates, or is there something structural going on? Lucas: I think there's a supply-side story too. During the pandemic and after, construction costs spiked in Europe — materials and labor. That slowed new builds. But then in 2025 and into this year, a lot of projects that were started in 2022 and 2023 finally completed. So we've seen a wave of new supply hit the market just as demand cooled. Luna: So you have more properties for sale, but fewer buyers with affordable financing. That's a recipe for flat prices. Lucas: Exactly. In Berlin, for example, new apartment completions in 2025 were the highest in a decade — over 18,000 units. That's great for renters, but it puts downward pressure on purchase prices. Luna: And what about the demographic angle? Europe's population is aging. In Germany, the median age is now over 47. That might mean fewer first-time buyers. Lucas: That's a longer-term trend. Younger Europeans are also more mobile — they're renting longer, moving for work. The homeownership rate in Germany is around 46 percent, which is low by OECD standards. Compare that to Spain at 76 percent or Italy at 72 percent. But even in those higher-ownership countries, prices are stalling. Luna: Let's talk about the divergence within the eurozone. Spain's housing market actually looks a bit stronger, right? I saw that the Spanish ETF, EWI, is up 1.6 percent over the past five days. Is that reflected in housing? Lucas: It's a mixed picture. Spanish house prices are up modestly — about 1 percent year-over-year. But that's partly because Spain's economy is growing faster than the eurozone average, and tourism-driven demand in cities like Barcelona and Madrid is holding up. But even there, transaction volumes are down. People are buying fewer homes. Luna: So the headline price index masks a slowdown in activity. What does that mean for the broader economy? If housing wealth isn't growing, does that affect consumer spending? Lucas: It can. The 'wealth effect' — when people feel richer because their home values rise, they spend more. That's been a factor in the US for years. In Europe, with flat prices, that effect is absent. And with real GDP growth at 1.6 percent, the eurozone can't afford any drag on consumption. Luna: But isn't there a silver lining? Lower housing costs might make eurozone exports more competitive? If wages are stable and housing costs aren't rising, the cost of living stays manageable. Lucas: That's a fair point. The eurozone's trade surplus has been under pressure — we talked about that in episode 31. But stable housing costs could help contain wage demands. If workers don't need big raises to cover rent, businesses might find it easier to keep labor costs competitive globally. Luna: So the ECB might actually be okay with flat house prices. It helps their inflation fight. Lucas: I think that's right. The ECB's mandate is price stability, not housing wealth. Christine Lagarde has said they watch asset prices for financial stability, but they're not targeting a housing boom. In fact, a correction that doesn't crash the economy could be healthy — it improves affordability for younger buyers. Luna: But there's a risk: if prices start falling significantly, you could have negative equity for recent buyers, and that could hurt bank balance sheets. Eurozone banks have been the surprise winners of higher rates, as we discussed in episode 29. A housing downturn could change that. Lucas: That's the key risk to watch. In 2025, the ECB stress-tested banks against a 20 percent house price drop. Most lenders passed, but with concentrated exposure — say, in German regional banks or Austrian lenders with Central and Eastern European exposure — there could be pockets of trouble. But so far, it's more of a 'soft landing' scenario. Luna: So where does this leave us? A year from now, do you see prices picking up or staying flat? Lucas: I think it depends on two things: ECB policy and migration. If the ECB cuts rates later this year — and markets are pricing in a cut in September — mortgage rates could drop to around 3.5 percent. That might revive demand. And net migration into the eurozone, especially into Germany, has been strong — over 400,000 people in 2025. That supports housing demand in the medium term. Luna: But if rates stay high, we could see more stagnation. It's a bit of a waiting game. Lucas: Exactly. For now, the housing market is telling us that even a decent economy can have soft spots. It's a reminder that the transmission of monetary policy takes time, and that structural factors matter. We'll be watching the ECB's June meeting next week for any signals on the rate path. Luna: And maybe we'll check back on those Berlin apartment prices in a few months. Thanks, Lucas. Lucas: Thanks, Luna. That's it for this episode of The European Economy Podcast. We'll be back soon.