After falling in the second and third quarter of 2023, housing prices started growing again in 2024. After rising steadily since 2013 and picking up in the aftermath of the pandemic crisis, nominal house prices in the EU experienced a mild decline in 2023. This decline was more pronounced in real terms – that is, when adjusting for inflation (using the private consumption deflator) and relative to household gross disposable income (see Graph 1). By end 2023, however, nominal house prices had broadly recovered their losses and increased more vigorously in 2024. The price recovery was accompanied by a recovery in transactions, to a level comparable to that recorded in the pre-pandemic years. By 2024-Q4, nominal house prices in the EU were 4.9% higher than a year earlier, surpassing the mid-2022 peak.
| Graph 1: Housing prices and price-to-income ratio, EU |
 |
In real terms, the price increase was more modest, but still 2.1% over the year. The magnitude of the increase varied considerably across Member States (see Graph 2). Bulgaria, Hungary, Portugal, Spain, the Netherlands, Poland, and Croatia recorded annual growth rates above 10% in 2024-Q4. At the other end of the spectrum, Sweden Germany, Austria, and Luxembourg — which experienced more significant contractions in 2023 — recorded more modest gains. France and Finland, in contrast, continued to see year-on-year declines.
| Graph 2: Nominal house price growth, 2023-Q4 and 2024-Q4 |
 |
The fall in housing prices was largely driven by weakening borrowing capacity. Since most home purchases are financed through mortgage credit, households’ borrowing capacity has historically been a key long-term driver of house demand and house prices. It is driven by household incomes, mortgage rates and other factors such as housing-related taxes and benefits. When the borrowing capacity weakens, prospective homebuyers may face larger required downpayments or simply be denied access to credit. They may also scale down or postpone the decision to buy a house. Households’ borrowing capacity fell sharply in 2022 and 2023, as the increase in household incomes was not sufficient to offset the negative impact of surging interest rates (see Graph 4). This was reflected in a sharp contraction of mortgage credit flows and ultimately falling prices.
| Graph 3: Mortgage flows and house price index, euro area |
 |
| Source: ECB. |
Home buyers have to cope with high house prices relative to their borrowing capacity. After the pandemic, the ratio between house prices and households’ borrowing capacity – which can be considered an indicator of housing affordability that explicitly takes the cost of mortgage lending into account - increased sharply in the EU (dark blue line in Graph 4). Initially, this was due to the surge in house prices, but then also the decline in borrowing capacity, as interest rates rose. With interest rates falling, the borrowing capacity of households rebounded strongly in 2024, outpacing the recovery in housing prices. Still, the affordability index remains well above its long-term average. As shown in Graph 5, the increase in real house prices has outpaced households’ borrowing capacity in most EU countries over the past five years, highlighting increasing difficulties for households to afford housing via mortgage credit.
| Graph 4: House prices over borrowing capacity ratio, and contributions to borrowing capacity change, EU | Graph 5: Borrowing capacity vs real house prices, 2019 to 2024-Q4 |
|
|
| Source: ECB. | Source: ECB. |
The sharp decline in housing supply since 2022 has contributed to the rebound in housing prices last year. Following the interest rate hikes in 2022, housing completions in the EU plummeted (see Graph 6).
| Graph 6: House supply indicators, EU |
 |
Similarly, building permits fell sharply in 2022 and have remained at very low levels since, suggesting that new housing supply will stay limited in the near future. This low supply can be attributed to high interest rates and elevated construction costs, but also structural constraints such as stringent environmental regulations and limited availability of buildable land. In many Member States, the constrained supply of new housing has become one of the main drivers of continued house price growth.
Going forward, further improvements in households’ borrowing capacity are set to foster housing demand, amid increasing prices (see Graph 7). After an improvement in 2024, households’ borrowing capacity in the EU is expected to improve further in 2025 and 2026, driven mainly by positive contributions from household incomes – as real wages are projected to increase by 1.6% this year and 1.1% in 2026. Rising house prices provide a positive signal to housing developers. Indeed, housing investment is set to start growing again this year. Still, the supply of new housing is set to respond with a lag to lower financing costs and higher prices.
| Graph 7: EU house price index and household income |
|
Further increase in house prices are set to lift confidence, but also to widen the gap between homeowners and renters. Real house prices and the price-to-income ratio are still below their 2022 peak. This may have contributed to dampening consumer sentiment by reducing the real value of household wealth for homeowners and, in turn, maintaining upward pressures on the saving rate, as households try to rebuild wealth buffers eroded by inflation. This effect is more pronounced in countries with higher homeownership rates and where housing wealth plays a larger role in household balance sheets. (1) A faster recovery in real estate prices therefore heralds a more dynamic consumption growth. At the same time, deteriorating affordability widens the gap between homeowners and non-homeowners, dampening the prospects of the latter to access property.