Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Europe's Housing Market Is Ignoring the ECB
Transcript
- Lucas: So we talk a lot on this show about the ECB's rate decisions, inflation divergence, trade shocks — but one thing we haven't touched yet is what's happening in European housing markets. And the story there is genuinely weird. Luna: Weird how? I mean, rates are still elevated. You'd expect housing to cool off. Lucas: You would. And in some markets, it did — briefly, in 2023 and early 2024. But since late last year, prices in a bunch of eurozone countries have been climbing again. Spain's a great example. First quarter of 2026, prices were up 6.8 percent year-over-year. Luna: That's not small. And that's while the ECB's deposit rate is still at 3.25 percent? Lucas: Yeah, exactly. The ECB hasn't cut once in 2026 — they've been stuck on hold since December. So the question is: why is housing ignoring the medicine? The easy answer is supply constraints, and that's part of it. But I think the more interesting forces are demographic and structural. Luna: Let's unpack that. What demographic shifts are you seeing? Lucas: So in Spain specifically — and this applies to Portugal, parts of southern France, even the Netherlands — you've got a combination of young adults finally forming households after years of living with parents, plus a wave of remote workers and retirees from northern Europe moving south. Spain added about 350,000 net new households in 2025 alone. Luna: And new housing supply can't keep up. Lucas: Barely. Permits in Spain are still running around 90,000 units a year — that's less than a third of what analysts estimate is needed. Construction costs are high, labor is scarce, and municipalities are slow to approve new projects. So you've got this structural mismatch that interest rates alone can't fix. Luna: Right, but higher rates should still dampen demand — mortgages get more expensive, people can't borrow as much. Lucas: And that did happen, especially in 2023. But the dynamic shifted. For one thing, a lot of buyers in these hot markets aren't using much leverage. Cash purchases in Spain hit 35 percent of transactions in the first quarter — that's up from 28 percent in 2022. Wealthier buyers, often from outside the country, are just buying outright. Luna: So the ECB's rate hikes are missing their target because the marginal buyer isn't rate-sensitive. That's a real problem for transmission. Lucas: Exactly. And it's not just Spain. Look at the Netherlands — prices there hit a new nominal record in April, up 4.5 percent year-over-year. The Dutch central bank has been warning that the market is overheating again. But the Bank's own models show that the main drivers are supply shortages and wage growth, not easy credit. Luna: Wage growth matters because even if rates are high, if your salary is up 5–6 percent, you can still afford a bigger mortgage payment. Lucas: Right. And European labor markets have been surprisingly tight — unemployment across the eurozone is at 6.2 percent, near historic lows. So you've got more people with stable incomes competing for a fixed stock of homes. That pushes prices up, regardless of what the ECB does. Luna: What about the countries that aren't seeing this rebound? Germany, for instance — prices there are still falling slightly, right? Lucas: Yeah, German residential property was down about 0.8 percent year-over-year in Q1. But that's actually a moderation — earlier in 2025 it was down closer to 3 percent. So the decline is slowing. And the German dynamic is different: you had a bigger construction boom in the 2010s, higher interest rate sensitivity among buyers, and less foreign demand. But even there, the floor might be near. Luna: So the ECB is in a tough spot. If housing is running hot despite high rates, does that argue for even tighter policy? Or do they look through it because it's supply-driven? Lucas: That's the debate inside the Governing Council right now. The hawks — think Bundesbank president Nagel — argue that rising housing wealth feeds into consumption and ultimately inflation, so the ECB can't ignore it. The doves say housing is a structural issue, not a monetary one, and tighter policy would just choke off the parts of the economy that are still weak, like manufacturing. Luna: And which side is winning? The data on core inflation has been sticky — 3.3 percent in April on the Fed's preferred gauge, and the eurozone's own core CPI has been hovering around 2.8 percent. So the hawks have some ammunition. Lucas: They do. And you've seen some ECB officials publicly mention housing as a concern. But I don't think they'll hike again this year unless something breaks. The risk is that they stay on hold too long, and housing just keeps inflating, creating a bigger affordability crisis and eventually a correction. Luna: Speaking of affordability — let's talk about the real-world impact. First-time buyers in Spain and Portugal are getting locked out. I saw a stat that the average age of first-time homebuyers in Spain is now 37, up from 32 a decade ago. Lucas: Yeah, that's brutal. And it's feeding into a broader wealth inequality story. Older homeowners are sitting on appreciating assets, while younger people are stuck renting at elevated prices. The ECB's own Financial Stability Review flagged this — they said housing wealth concentration is worsening generational divides. Luna: And there's not much the ECB can do about it directly. They can't build houses. They can't restrict foreign buyers. They can only set one interest rate for the whole currency bloc. Lucas: Right. And that's the deeper point of this episode: monetary policy is a blunt instrument. It works well for demand-driven inflation, but when you've got supply constraints, demographic shifts, and foreign capital flows, it's like trying to fix a leaky pipe by turning up the heat in the house. You might adjust the temperature, but the leak is still there. Luna: It's a good reminder that macroeconomics is more than just central bank policy. The real action is often in structural forces that don't fit neatly into the models. Lucas: Exactly. And speaking of that — I want to mention something briefly. We do these episodes every day, and we deliberately keep them ad-free. No sponsor breaks, no commercials. It's just us digging into the numbers and the stories. If you find that approach valuable and want to support it, there's a link — buy me a coffee dot com slash fexingo. No pressure at all, but it helps us keep doing this exactly the way we do. Luna: Yeah, we really appreciate everyone who's chipped in. It lets us stay independent and focus on what actually matters. Lucas: So back to housing — one more thing I think is worth watching. The European Investment Bank recently launched a pilot program to fund affordable housing construction in southern Europe, using EU guarantees to lower borrowing costs for developers. It's tiny — only 500 million euros — but it signals that policymakers are starting to look beyond the ECB for solutions. Luna: That's interesting. Do you think it scales? Lucas: Maybe, if it proves that public-private partnerships can actually deliver units at below-market rents. But even if it does, it'll take years to make a dent. Housing is the kind of problem that doesn't get solved in one cycle. It's a multi-decade challenge. Luna: And one that's going to shape European politics for a long time. You're already seeing housing become a major issue in local elections in Spain and the Netherlands. Lucas: Absolutely. For me, the big question is: can the eurozone manage this without a full-blown housing crisis in its most dynamic cities? Because if prices keep rising while rates stay high, the correction — when it comes — could be ugly. But if they find a way to boost supply, you might get a soft landing. Luna: I guess we'll be watching. Thanks, Lucas. Lucas: Thanks, Luna. Talk tomorrow.