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

  //house-home.news-articles.net/content/2025/09/1 .. over-next-two-years-affordability-to-worsen.html
  Published in House and Home on Tuesday, September 16th 2025 at 9:01 GMT by reuters.com
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German Home Prices Set for Steady Recovery Over Next Two Years, Affordability Worsens

September 16, 2025 – Reuters

German housing markets, battered by the pandemic‑driven slump in the early‑2020s, are now poised for a modest but steady rebound. Yet, despite the uptick in prices, the affordability of buying a home is expected to deteriorate in the coming years, according to a new report released by Germany’s Federal Statistical Office (Destatis). The study, released just days after the European Central Bank (ECB) signalled a tightening of monetary policy, predicts a gradual recovery in home prices over the next two years, while the price‑to‑income ratio climbs to levels that could make home ownership increasingly out of reach for many Germans.

1. A Slow, Steady Upswing in Prices

Destatis’ analysis, based on the German Residential Property Index (GPR), shows that German home prices rose by 1.6 % in 2023, the fastest growth since 2013. While the annual increase is modest compared with the 3‑5 % swings seen in some other European markets, the trend indicates a return to a pre‑pandemic equilibrium after the sharp decline that began in 2020.

The agency projects the following year‑on‑year growth rates for residential property:

The 2024‑2025 window is therefore seen as a “steady recovery” phase, with the 2026 forecast suggesting a brief slowdown before the market stabilises at a new baseline.

2. Affordability Deteriorates Despite Rising Prices

Price growth is only part of the story. The report emphasises that the price‑to‑income ratio – a benchmark for how many years of average earnings it takes to buy a typical home – is expected to rise from 6.5 in 2023 to 7.5 by 2025. A ratio above 6.0 is usually considered a warning sign in the German market, signalling that home ownership is becoming increasingly out of reach for many households.

“We are witnessing a classic affordability crisis,” said Dr. Maria Klein, lead economist at Destatis. “While prices are climbing, wage growth remains sluggish, and mortgage rates are higher than they were during the pandemic’s low‑rate era.”

The ECB’s recent decision to raise its key rate to 3.75 % has pushed German mortgage interest rates to an average of 6.2 % for 30‑year fixed‑rate loans, up from the 2.7 % average in early 2023. The higher cost of borrowing amplifies the burden on potential buyers, pushing the price‑to‑income ratio higher even as prices themselves only climb modestly.

3. Supply Constraints and Demographic Pressures

The German housing sector faces a chronic supply deficit. The 2023 housing start numbers – 300 000 new units – fell short of the 1.2 million units needed to match the country’s annual demand, according to the German Housing Association (Bauen und Wohnen). The construction bottleneck is driven by a shortage of skilled labour, restrictive zoning laws in major cities, and rising material costs.

Compounding this supply crunch is Germany’s demographic shift. The population is ageing, with a projected 20 % of residents over 65 by 2030. This demographic shift is expected to shift demand towards smaller, more affordable housing options, further tightening the market.

4. Government Response: Mortgage Credit Guarantee Scheme

In an attempt to stem the spiralling affordability gap, the German federal government introduced a mortgage credit guarantee scheme in 2024. The programme offers a 50 % guarantee on new mortgage loans for first‑time homebuyers purchasing properties priced below €500 000. While the policy has helped a small fraction of buyers secure financing, experts argue that it is insufficient to counterbalance the rising mortgage rates and the supply deficit.

“The guarantee scheme is a useful tool, but it does not address the root causes of affordability – high prices, low wages, and limited supply,” noted Karl Schmidt, a senior analyst at the German Economic Institute. “We need broader reforms that increase construction and support wage growth.”

5. Wider Context: European and Global Housing Trends

Destatis’ findings are consistent with a broader European trend. According to Eurostat, the average price‑to‑income ratio across the EU is 7.8, slightly above Germany’s projected 7.5 by 2025. In contrast, the UK and France have experienced sharper price increases but have also implemented robust affordability‑support schemes, keeping their ratios below 6.5.

The United States, meanwhile, has seen a more pronounced price surge, with the price‑to‑income ratio in the New York metro area reaching 10.5. Despite this, U.S. mortgage rates have remained lower, thanks in part to the Federal Reserve’s more gradual tightening.

6. Looking Ahead

The Reuters article concludes that the German housing market is poised for a gradual rebound in home prices, yet the affordability landscape is likely to worsen. With the ECB signalling that the current tightening cycle will continue until the mid‑2020s, and supply constraints persisting, the pressure on potential buyers will only increase.

“The next couple of years will be critical,” said Dr. Klein. “If policy makers cannot intervene to increase supply and support wage growth, the affordability crisis will deepen, potentially stalling the broader economic recovery.”

Key Takeaways

• Price Growth: 1.6 % in 2023, with modest growth projected through 2026.
• Affordability: Price‑to‑income ratio expected to rise to 7.5 by 2025, signalling declining affordability.
• Mortgage Rates: Average 6.2 % for 30‑year fixed loans, up from 2.7 % in 2023.
• Supply Deficit: 300 000 new units in 2023 versus a 1.2 million‑unit annual demand.
• Government Measures: 50 % mortgage credit guarantee for first‑time buyers, but deemed insufficient.

The article underscores that Germany’s housing sector, while showing signs of recovery, remains at a crossroads. The dual forces of rising mortgage rates and constrained supply are set to test the resilience of the German economy in the years to come.