The European housing market has turned a corner, but challenges remain

The past couple of years have been tough for housing markets across many European cities. Following a post-Covid surge, house prices in some cities experienced a significant correction throughout 2022, 2023 and into 2024. This was driven by a substantial fall in demand as high inflation, rising interest rates and a weakened economic climate squeezed household finances and reduced the appetite for residential transactions. Some cities particularly those in southern and Central and Eastern European cities held up better than others, with house price growth slowing rather than experiencing outright declines.  

Cities in the Nordics fared particularly badly, as a greater dependency on variable rate loans meant that the increased cost of borrowing and financing mortgages quickly impacted household finances, hitting demand. In Stockholm, the SCB real estate index was down 16% in Q1 2024 from Q2 2022, compared to 13.6% in Sweden, while the house price index in Helsinki fell by 13.9% (Q2 2022–Q3 2024) peak-to-trough compared to 11.4% nationally (Q2 2022–Q1 2024).

But even in the cities that didn’t fare quite so poorly, those that declined still experienced a fall in house prices that was deeper and more protracted than the national average. This underperformance was unusual for major cities, as, historically, house price growth tended to outperform the rest of the country. However, with house prices surging at a greater pace than the national average during Covid—and with housing affordability already more stretched—cities were more exposed to the weakening economic conditions that reduced demand.

However, the housing market across most of Europe has now improved, with declines bottoming out throughout 2024 and modest growth returning. With the ECB and other central banks now well into their interest rate cutting cycles, inflation under control and general economic conditions improving (albeit gradually), demand is expected to increase over the coming year. This is anticipated to lead to a pick-up in house price growth in 2025, with the cities that fared the worst throughout 2022–24 generally leading the charge.

We expect healthy growth to be maintained over the forecast period, with regional differences driven by economic factors that influence housing demand, such as our outlook for income growth and the unemployment rate. For that reason, we expect Amsterdam, for example, to continue to experience the fastest growth in house prices in the Netherlands over the medium term; healthy expansion in the city’s highly productive economy will boost incomes at a faster rate than the Dutch average, thereby supporting population growth and future residential demand. The same can generally be said for Stockholm in Sweden, Lyon in France and Vienna in Austria.

The housing market remains a key challenge for city economies

This has knock-on implications for the rental market too. A continued imbalance between supply and demand will drive rents even higher (which kept rising even when house prices fell). This is particularly important for cities where the population tends to be younger, more geographically mobile, and therefore more likely to rent. If the income premium that city residents enjoy continues to be eroded, this may weaken the competitive advantage that has been key to the recent successes of city economies. Still, high frequency migration and population data for large cities have remained fairly healthy lately. This suggests cities still retain the “pull factor,” and therefore we don’t think we’re at a tipping point yet.