German Housing Market Likely To Bend, Not Break

Photo by Dillon Kydd on Unsplash

After a solid rebound in 2025, momentum in the German housing market has started to soften again. The latest market conditions may feel uncomfortably familiar, but despite the déjà vu, this is not 2022 all over again. The German housing market rebound is likely to bend not break.

German house prices moved closer to pre-crisis levels in 2025

The German housing market mirrored the broader economy in 2025: after two years of contraction, both GDP and house prices returned to positive territory. According to the German Statistical Office’s just-released house price index, house prices rose by 3.2% last year. With this, house prices are still some 8% below the peak reached in 2022, but at the same time, they are more than 5% up from the trough reached in 2024.

House prices compared to recent peak and trough levels

Source: German Federal Statistical Office; ING Economic & Financial Analysis

However, the annual figure masks a clear loss of momentum. After three consecutive quarters of roughly 1% quarter‑on‑quarter growth, price dynamics slowed to 0.1% QoQ in 4Q 2025. Lending data tells a similar story. New mortgage lending was still up by 37% year-on-year in the first quarter of 2025 but had slowed to 13% YoY by year-end.

Part of this softening reflects base effects. But unfavourable developments in affordability and weak consumer sentiment had a negative impact too. Wage growth eased, house prices increased, and scope for further declines in lending rates was limited.

A temporary setback at the beginning of 2026

Early 2026 developments have been mixed. In January, mortgage rates climbed to their highest levels since mid‑2024, dampening demand. February briefly brought relief: lower capital market rates reduced financing costs, which could have spurred a short‑term rebound in loan demand. But this window closed quickly as the escalation in the Middle East pushed energy prices higher, reignited inflation fears, and triggered a sharp sell‑off in government bond markets. German 10yr yields have risen by more than 30bp since late February – probably enough to push lending rates back above 4% going forward.

Market interest rates and lending rates

(%)

Source: LSEG Datastream; ING Economic & Financial Analysis

As a result, the recovery in the housing market is likely to face a temporary setback. Elevated uncertainty, rising energy costs and weaker consumer confidence will probably lead to an increase in households’ propensity to save, while higher financing costs will add further financial strain.

Why this is not like 2022

The current macro environment feels uncomfortable and brings back painful memories of 2022, when rising energy prices exacerbated inflation, policy rates were raised at an unprecedented pace, and the German housing market practically came to a standstill. However, in 2022, the rate shock hit a housing market that was at the end of a long boom period, with average mortgage rates surging from near-zero to more than 3.5%. At the current juncture, mortgage interest rates are already much higher and even in a worst-case scenario, most of the expected rate hikes from the European Central Bank are already priced in. While we don’t expect the ECB to hike rates at all in our base case scenario, even some monetary policy tightening would fall shy of the rate shock we saw in 2022.

At the same time, the structural mismatch between supply and demand remains a stabilising force and, assuming energy prices stabilise, Germany’s economic recovery – if not hampered by the new energy price shock – should gain traction later this year, adding cyclical support to the market.

As a result of the current macro backdrop, the German housing market is likely to face a pause, not a break. Higher energy prices and renewed uncertainty will slow the recovery in the near term, but structural foundations – limited supply, gradually improving economic conditions, and an ECB unlikely to revisit aggressive tightening – argue against a 2022‑style correction. For now, this looks like a short‑term setback, not the end of the rebound.