One of the main reasons why house prices in the euro area soared in the decade prior to the European Central Bank's (ECB) most recent interest rate hike cycle was the surge in housing demand on the back of a variety of structural factors. A disproportionately large increase in the number of households compared to population growth played a decisive role here. Between 2013 and 2023, the euro area's population grew by about 3%, but the number of households grew by 7%. As a result, the number of people sharing a household fell.
In 2023, the average household size in the euro area is 2.2 people. Just 10 years ago, an average of 2.3 people shared a household. In Germany, the average household size is now 2 people, while in the Netherlands and Belgium, the average is 2.1 and 2.3 people sharing a household, respectively. As a result, the types of housing in demand are changing in line with the development of household sizes and types. And some housing still on the market no longer meets demand.
In some countries, the number of households is growing much faster than the housing stock, exacerbating the structural housing shortage significantly. The situation is most acute in the Netherlands, where the number of households is growing much faster than the housing stock. In Germany, the number of households and the housing stock are growing at roughly the same rate, while in Belgium the growth in the housing stock is outpacing the growth in the number of households.
Moreover, prosperity in many euro area countries has increased significantly over the past decade: real total disposable income per capita in the euro area was around 11% higher in 2023 than in 2013. Increased purchasing power has historically had a positive impact on home affordability: Combined with favorable lending rates, the idea of home ownership has become more achievable for many people.
However, in recent years, this surge in demand has not been met, and a strong excess demand has built up over time. Between 2013 and 2023, the construction of 3.2 million new homes was permitted in Germany. At the same time, only 2.7 million homes were completed. The situation is similar in Belgium, where the construction of around 545,000 apartments was approved over the past decade, but the actual number of apartments increased by only 515,000.
When looking at new home construction in the Netherlands, one first gets the impression that the situation is calmer than in Germany or Belgium. In the past decade, the construction of around 640,000 new homes was permitted, and in the same period, roughly the same number of new homes were completed. However, according to ABF Research, it is estimated that the Dutch housing market is around 390,000 homes short of the number of home buyers looking to buy.
The failure of construction activity to keep up with strong demand in recent years can on the one hand be explained by structural factors: between 2013 and 2023, on average 15% of euro area construction companies say that labour shortages will limit their activity, compared to only 10% over the previous decade. Moreover, investment activity in residential construction has remained almost stable over the past 30 years and has lagged behind the growth in housing demand.
In the Netherlands, house prices recently surpassed their peak level for mid-2022. After falling by about 6% between July 2022 and May 2023, house prices began to rise sharply last June. In April 2024, house prices increased by 7.5% compared to the same month last year.
In Belgium, wage indexation has helped keep the housing market much more stable than in many other euro zone countries last year, with the median house price up 1% in the first quarter of 2024 from a year earlier.
Meanwhile, in Germany, house prices fell 1.1% quarter-on-quarter in the first quarter of 2024 as the housing market bottoming out proved to be longer than expected.
However, the euro area housing market is already beginning to show tentative signs of recovery, driven mainly by improvements in home affordability. Mortgage rates fell significantly at the start of the year. At the same time, house prices are below 2022 levels and wages in the euro area rose by 5.3% in the first quarter of 2024. Although home affordability has only improved from very low levels and the potential for further improvement remains limited, demand is expected to gradually recover over the course of the year.
