Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Home Prices Are Rising Despite Rate Cuts
Transcript
- Lucas: So the ECB has been cutting rates since the summer of 2024 and the eurozone economy is still limping along. But here's something that doesn't fit the script: home prices are going up. Not just a little — in Germany, the biggest eurozone economy, residential prices rose two point eight percent quarter-over-quarter in the second quarter of 2026. Luna: That seems backwards. If the ECB is cutting rates to stimulate a weak economy, housing should be getting cheaper, not more expensive. Unless something else is going on. Lucas: Exactly. And that something else is structural. The Bundesbank published its quarterly housing market report last week, and the headline is that supply is simply not keeping up with demand. Construction permits for new homes in Germany fell another twelve percent year-over-year in May. That's on top of a fifteen percent drop in 2025. Luna: So builders aren't building, even though borrowing costs are coming down. That's a pretty big disconnect. Lucas: Right. And it's not just Germany. Across the eurozone, construction activity has been shrinking for three straight quarters. The ECB's own bank lending survey shows that demand for housing loans is actually picking up — but banks are still tightening credit standards for construction firms. They're worried about the economic outlook and rising input costs. Luna: So demand for homes is there, but supply is constrained. That's a classic recipe for price increases, regardless of what the central bank does with rates. Lucas: Precisely. And immigration is adding to demand. The eurozone population grew by roughly one point one million people in 2025, driven by work-related migration from outside the EU. Most of those people need housing. In Germany alone, net migration was about four hundred thousand. That's roughly the same as the number of new homes completed annually — which is already below what analysts say is needed. Luna: Which is around three hundred thousand per year for Germany, if memory serves. And completions are running at about two hundred and eighty thousand? So already a shortfall, and permits are falling. Lucas: Yes. The Bundesbank estimates the cumulative housing deficit in Germany is now around eight hundred thousand units. And that's before you factor in the shift from renting to owning that's happening because of low mortgage rates. Luna: Wait, are mortgage rates actually low? The ECB's deposit rate is at two and a half percent now, down from four percent in mid-2024. But banks haven't passed those cuts through fully to mortgage borrowers, have they? Lucas: They have, actually. The average mortgage rate on new loans in the eurozone is now around three point two percent, down from four point five percent a year ago. That's a meaningful drop. And it's tempting buyers back into the market after a two-year slump. In Spain, home sales jumped eighteen percent year-over-year in May. Luna: Spain is an interesting parallel. Prices there rose even faster — up four point one percent quarter-over-quarter in Q2. And that's driven partly by foreign buyers, partly by domestic demand. But the supply picture is similar: construction has been below replacement levels for years. Lucas: Right. So what we're seeing is a classic case of monetary policy transmission breaking down. The ECB cuts rates to lower the cost of borrowing and stimulate investment and consumption. That part works for home buyers. But the supply side doesn't respond because of structural constraints: labor shortages in construction, high material costs, regulatory hurdles, and land scarcity. Luna: And that creates a perverse outcome. Lower rates should make housing more affordable, but because supply can't expand, prices just go up. First-time buyers are actually worse off than they were a year ago, even though rates are lower. Lucas: That's a key point. The ECB's own analysis in its June Financial Stability Review flagged exactly this risk: that the housing market could overheat again if demand picks up faster than supply. They're worried about a repeat of the 2021-2022 price boom, which was followed by a sharp correction when rates rose. Luna: But the difference this time is that the broader economy is weak. In 2021, GDP was rebounding strongly. Now we're barely growing — real GDP growth was just two point one percent annualized in Q1 2026. So a housing price run-up in a sluggish economy looks more like an asset bubble than a recovery. Lucas: That's the worry. The ECB is caught between wanting to support growth and not wanting to inflate asset prices. President Lagarde hinted at that in her press conference two weeks ago — she said the governing council is 'monitoring housing market developments closely' and that 'macroprudential tools may be needed.' Luna: Meaning they might lean on national regulators to tighten loan to value ratios or income-based lending limits, rather than raising rates. Lucas: Exactly. That's the tool kit. But it's uneven across countries. Germany already has relatively conservative lending standards. Spain and the Netherlands have looser ones. So the ECB can't apply a one-size-fits-all solution. Luna: And any macroprudential tightening would clash with the ECB's broader goal of stimulating the economy. If you restrict mortgage lending, you reduce consumption and investment further. It's a tough needle to thread. Lucas: Yeah, and there's another layer: the construction industry itself. If prices keep rising, developers have more incentive to build. But they can't because of capacity constraints. The Eurozone construction PMI has been below fifty for sixteen consecutive months. The sector is in recession. Luna: So the supply response is delayed, maybe by years. In the meantime, prices rise, and affordability worsens. That feeds into political discontent, especially among younger voters. Lucas: Absolutely. Housing is becoming a major political issue in Germany and France ahead of the 2027 elections. The German government recently announced a ten billion euro housing initiative to speed up permitting and subsidize affordable construction. But that will take time to have an effect. Luna: It's interesting — the ECB is doing its part on the demand side, but the supply side is controlled by national governments. So the housing market outcome depends more on Berlin and Madrid than on Frankfurt. Lucas: That's a good way to frame it. And it leads to a broader question: how effective can monetary policy be when the real constraints are structural? If the ECB cuts rates but housing prices rise and construction doesn't pick up, what has the policy achieved? Luna: Probably just a wealth effect for existing homeowners. And maybe a bit more consumer confidence. But the transmission to the broader economy is weak. Lucas: Speaking of weak transmission — if you've been following this episode and feeling like you're getting a clearer picture of how these forces interact, honestly, if today's conversation was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to help keep the show ad-free and independent. We don't have a big network behind us, just listener support. Lucas: Right. And it means we can keep digging into topics like this without worrying about commercial breaks. So anyway — back to the housing market. Luna: So if supply is the key constraint, what would actually break the logjam? Is there a scenario where construction picks up meaningfully in the next year? Lucas: It's possible, but it would require a few things to align. First, material costs — steel, concrete, lumber — have stabilized after the 2021-2023 spike, but they're still elevated. Second, labor shortages: the eurozone construction sector is short about five hundred thousand workers, according to the European Construction Industry Federation. Wages are rising but not enough to attract new entrants. Luna: And regulatory barriers. In Germany, the average time to get a building permit is about six months. In France, it's similar. Streamlining that could help, but it's politically difficult because of local zoning rules and environmental reviews. Lucas: Right. So the most likely near-term scenario is continued price growth of two to four percent annually across the eurozone, with hotspots like Spain and Portugal seeing higher numbers. That's not a bubble, but it's a persistent affordability problem. Luna: And for the ECB, it means they have to be careful about cutting too aggressively. Because if they push rates below neutral, they risk fueling housing demand even more, without any supply response. Lucas: Exactly. The neutral rate for the eurozone is estimated around one point five to two percent. The deposit rate is at two point five. So they have some room to cut, but not a lot. The market is pricing in one more quarter-point cut in September, then a pause. Luna: So the housing market might be the factor that forces the ECB to stop cutting earlier than they would like. That's a new twist. Lucas: Yes, and it ties into the broader narrative of the eurozone being a 'two-speed' economy. Housing is buoyant in some regions, but manufacturing is in recession, and services are slowing. The ECB has to balance all of that. Luna: It feels like the housing market is becoming a leading indicator of the limits of monetary policy. If you can't stimulate supply, you just inflate asset prices. Lucas: That's the lesson from this episode. And it's one that policymakers in Frankfurt and national capitals will have to grapple with. Because if housing becomes unaffordable for a generation, the political consequences could be severe. Luna: And the economic ones too. If young people spend a larger share of income on housing, they consume less, invest less in education, and take fewer risks. That drags on long-term growth. Lucas: Exactly. So the housing market isn't just a real estate story — it's a macro story with real implications for productivity and potential growth. We'll be watching the construction PMIs and permit data closely in the coming months. Luna: And the next Bundesbank report. That's due in October. We'll have more then. Lucas: Absolutely. For now, that's the picture: ECB cuts, housing rises, supply stuck. Thanks for being here.