Macroeconomic conditions and policy shifts drive euro area housing investment
Euro area housing investment has bottomed out but a sustained recovery is yet to emerge, declining 0.2 percent in the third quarter of 2025. An ECB analysis attributes subdued dynamics to weak macroeconomic conditions and lagged monetary policy tightening, partially offset by improving housing-specific demand.
Policy lags and demand shifts shape investment
The ECB's structural empirical model identifies key drivers behind euro area housing investment dynamics.
Housing investment initially surged during the pandemic due to stronger housing demand, reflecting shifts towards larger living spaces from remote working.
This demand normalized post-pandemic, causing negative housing demand shocks in 2022. Subsequently, adverse aggregate demand shocks, driven by the energy price shock and heightened uncertainty from Russia's invasion of Ukraine, became prominent.
Negative housing supply shocks, pushing up construction costs and house prices, further dampened activity.
These effects were exacerbated by interest rate shocks, reflecting the lagged impact of the 2022-23 monetary policy tightening cycle.
The negative impact of these combined shocks peaked in the second quarter of 2024. More recently, the drag from interest rates has begun to diminish following monetary policy easing.
However, aggregate demand shocks remain persistently negative due to geopolitical tensions and subdued consumer confidence.
Conversely, housing demand shows signs of recovery, evidenced by positive housing demand shocks and a rapid rebound in house prices since the first quarter of 2024.
A gradual recovery on the horizon
Euro area housing investment has bottomed out, though a sustained recovery is not yet evident.
It declined 0.2 percent in Q3 2025, remaining 7 percent below its Q1 2022 peak.
Country-specific trends varied, with Germany and France seeing substantial declines, while Italy and Spain recorded increases.
The outlook points to more sustained upward momentum, driven by strengthening housing demand and improving broader economic growth.
The lagged effects of past monetary policy easing are also expected to feed through.
This is corroborated by recovering housing loans, increased transactions, and improving consumer sentiment reflected in recent surveys.
Fragile rebound, critical dependencies
The ECB's analysis provides a robust framework for understanding complex housing market dynamics.
However, the projected recovery remains vulnerable to persistent macroeconomic headwinds and geopolitical uncertainties.
Sustained growth in housing investment will ultimately depend on a broader economic upturn and continued policy support.