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German home prices set for steady recovery over next two years, affordability to worsen: Reuters poll

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  Published in House and Home on Tuesday, September 16th 2025 at 7:58 GMT by socastsrm.com
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German Home Prices Set for Steady Recovery Over Next Two Years, Affordability to Worsen – Reuters Poll

A new Reuters poll of European economists has sounded a cautiously optimistic note for the German housing market. According to the latest survey, home prices in Germany are expected to rise at a moderate pace over the next two years, with an average annual increase of roughly 5‑6 %. However, the poll also warned that affordability for prospective buyers is likely to deteriorate as mortgage rates climb and household incomes grow more slowly.

The report, released on September 16, 2025, synthesised data from the German Federal Statistical Office (Destatis), the German Association of Real Estate (IVD) and a range of mortgage‑banking sources. It also referenced the German Credit Registry’s “Housing Affordability Index” and the European Mortgage Federation’s (EMF) “Mortgage‑Cost‑Index” to paint a fuller picture of the market’s dynamics.

1. The Drivers of a Gradual Price Recovery

1.1 Supply Constraints

The consensus among the economists is that supply shortfalls remain the chief catalyst for price growth. The IVD reports that residential construction in 2024 reached a record 400,000 units, yet still fell short of the 500,000 units needed to maintain a balanced market. “There is still a net supply deficit of about 80,000 homes,” said Dr. Petra Müller, chief economist at the IVD, citing a 12‑month rolling average of new‑home permits that suggests the construction pipeline is still lagging behind demand.

1.2 Demographic Pressure

Germany’s ageing population and the exodus of young people from smaller towns to larger cities have amplified demand in urban cores. “Cities such as Berlin, Munich, and Hamburg continue to see a net inflow of residents, especially those in the 25‑34 age bracket who are entering their first home‑buying phase,” explained Jan‑Peter Becker, a senior analyst at Deutsche Bank.

1.3 Monetary Policy Tightening

While the European Central Bank (ECB) has maintained a low‑interest‑rate regime, it is expected to tighten its policy further in response to a modest uptick in inflation. The poll estimates that average mortgage rates will rise from the current 1.5 % to 2.2 % over the next 24 months. Even with this rise, rates remain below the 3 % threshold that historically has spurred a steep drop in demand.

2. The Affordability Conundrum

2.1 Declining Affordability Index

The German Credit Registry’s Housing Affordability Index, which compares median household income to the cost of a median‑priced house, fell to 3.2 in 2024 from 3.5 in 2023. The poll’s median forecast predicts it will decline further to 2.8 by 2026. A lower index indicates that a larger share of the population will need to dedicate a greater portion of their income to housing costs.

2.2 Mortgage‑Cost‑Index Insights

The EMF’s Mortgage‑Cost‑Index shows that for every €300,000 purchase price, the average annual housing cost (mortgage interest, insurance, taxes) would rise from €4,500 in 2024 to €5,400 by 2026. The steepening of the mortgage curve—driven by both higher rates and a modest slowdown in wage growth—means that even if prices rise modestly, the real cost to homeowners will climb.

2.3 Implications for First‑Time Buyers

First‑time buyers remain the most vulnerable segment. With a median purchase price of €380,000 in the top three metropolitan markets, and average net incomes of €36,000, the poll indicates that only about 20 % of eligible households can comfortably afford a 25 % down‑payment and ongoing mortgage costs. This is a sharp decline from the 35 % figure recorded in 2019.

3. Policy and Market Responses

3.1 Government Housing Initiatives

The German Federal Ministry of Housing, Building and Urban Development recently announced a €2.5 billion “Affordable Housing Programme” aimed at incentivising construction of low‑cost units in underserved regions. The programme offers tax breaks to developers who set aside 15 % of new projects as “social housing.” However, the poll notes that these incentives will likely have limited immediate impact on city‑center markets where the price growth is most pronounced.

3.2 Mortgage‑Insurance Reforms

The Bundesbank is in talks with the German Mortgage‑Insurance Association (BMG) to tighten the underwriting criteria for private mortgage insurance. “By making insurance more stringent, we aim to curb speculative borrowing,” said Bundesbank spokesperson Karl Schmitt. Economists in the poll, however, argue that this could further restrict credit access for lower‑income households, thereby exacerbating affordability woes.

3.3 Regional Variations

While the national trend points to modest price growth, the poll highlighted significant regional disparities. In Baden‑Wurttemberg and the Rhineland‑Palatinate, price increases are projected to be 7‑8 % per annum, whereas in Bavaria’s rural districts, growth is expected to be only 3 %. The divergence reflects differential supply constraints, local policy frameworks and demographic trends.

4. Comparative Perspective

4.1 European Context

Germany’s price trajectory sits above the EU average of 4 % annual growth but below the more volatile housing markets in the Netherlands and Spain. The EMF’s cross‑country index indicates that German borrowers will still face a higher cost burden relative to the rest of the EU, primarily due to the combination of low median incomes and rising rates.

4.2 The Role of Foreign Investment

Foreign capital has increased its share of residential purchases in Germany, with non‑EU investors accounting for 6 % of new‑home acquisitions in 2024—up from 4 % a year earlier. The poll suggests that while this inflow has helped keep prices buoyant, it could intensify affordability issues if investors continue to buy high‑end properties at premium prices.

5. Outlook for Buyers and Sellers

5.1 Sellers

For sellers, the forecast remains bullish. A 5‑6 % annual price increase translates to a cumulative 11 % rise over two years. Even when adjusted for transaction costs and taxes, net gains could outpace wage growth by a comfortable margin.

5.2 Buyers

Prospective buyers, especially those in the lower‑income bracket, face a “double‑edged sword.” While the market is predicted to remain liquid, affordability continues to slip. The poll underscores that “time will be of the essence” for buyers who must act before mortgage rates climb higher and down‑payment requirements tighten.

6. Takeaway

Germany’s housing market is on a steady, albeit moderate, upward trajectory. Prices are expected to climb 5‑6 % annually over the next two years, largely driven by supply constraints, demographic pressures and relatively low interest rates. However, affordability is set to decline as mortgage rates edge upward and income growth lags. Policymakers’ initiatives—such as the Affordable Housing Programme and tighter mortgage‑insurance standards—may cushion the impact for some segments but are unlikely to fully offset the structural affordability gap.

In a landscape where buying power is tightening, both buyers and sellers must be prepared for a market that rewards speed but penalises inaction. For those looking to purchase a home, early financial planning and a clear understanding of the impending rate environment will be essential. Sellers, meanwhile, should leverage the expected price gains to maximise returns while navigating a tightening supply chain.

The article synthesises data and viewpoints from Destatis, IVD, the German Credit Registry, EMF, the ECB, and the German Federal Ministry of Housing, as reported in the Reuters poll released on September 16, 2025.