European Central Bank analyses recent euro area house price cycle and reports a mild downturn followed by rapid recovery

The European Central Bank published an Economic Bulletin article reviewing the latest euro area house price cycle and its drivers, concluding that the post-2022 downturn was relatively shallow and short-lived and that prices had already returned to the prior peak by the third quarter of 2024. The analysis suggests the correction unwound much of the pandemic-related surge but left house prices at elevated levels, with affordability still constrained. In nominal terms, the peak-to-trough decline was around 3% over one and a half years, compared with almost 5% over two years during the global financial crisis and the sovereign debt crisis, despite valuation estimates indicating larger overvaluation ahead of the 2022 peak. Recent euro area-wide dynamics were more influenced by “core” countries, particularly Germany, and the downturn was less widespread across countries than in earlier cycles. The article also highlights differences across segments, including a relative slowing of capital-city prices versus country averages since the pandemic and greater cyclicality in existing-dwelling prices than new-build prices. Model-based results attribute a larger role in the latest downturn to aggregate supply shocks (including energy and pandemic-related disruptions) and a more noticeable contribution from monetary policy tightening than in prior declines, while resilient income growth, sounder household and bank balance sheets, wider use of fixed-rate mortgages and macroprudential measures, and persistent housing supply constraints (including historically low building permits and high construction costs) helped limit the bust and supported the subsequent rebound.