Is housing still a good investment?

Home prices in many European countries appeared to defy gravity during the Covid-19 pandemic, much to the bemusement of analysts. At a time when economies experienced unprecedented turbulence, it seemed incongruous that residential property should have been so buoyant. Since then, however, the market in many countries has been negatively impacted by the resurgence of inflation and an abrupt end to nearly a decade and a half of ultra-low interest rates.

Paradoxically, the European housing market appeared to benefit in 2020 and 2021 from the repeated periods of constraints on personal movement and the economic volatility stemming from the tightening and loosening of lockdown restrictions, both in terms of transaction numbers and price levels.

The market seemingly did not experience the negative impact seen during previous economic downturns. Many residential property investors remember ruefully the fallout from the 2007-09 global financial crisis, when Spain’s and Ireland’s property markets went into free fall, admittedly from extremely overheated levels. Only in Germany, Luxembourg and Sweden did markets prove relatively resilient.

In Luxembourg, which had seen a boom in residential property prices for more than two decades, the pandemic caused little more than a hiccup.

In Luxembourg, which had seen a boom in residential property prices for more than two decades, the pandemic caused little more than a hiccup. The cost of a house or apartment grew by 135% between 2010 and 2022, according to Eurostat, significantly higher than the EU average of 47%. By contrast, growth in rental prices in Luxembourg increased by no more than 20% over the 12-year period, close to the EU average.

First slowdown in decades

However, subsequently the grand duchy’s residential property market experienced its most significant slowdown in decades. According to online real estate listings platform Immotop, the average price of homes and apartments in the grand duchy peaked at €9,208 per square metre in July 2022; by May 2023 it had declined to €8,626, and to €8,464 a year later. The market bottomed out at €8,173 per square metre in March 2025 and saw a weak recovery to €8,309 the following September. Analysts attributed the stalling of the market to the impact of higher borrowing costs at a time when inflation was eating into purchasing power, despite an ongoing shortage of properties for sale.

The slump in the grand duchy represented a significant change; for most of the previous two decades, buoyed by the ‘great moderation’ characteristics of low inflation and interest rates amid steady economic growth and rising earnings, investment in Luxembourg houses and apartments had been a one-way bet.

Although analysts have routinely described Luxembourg’s housing market as overheated in recent years, many industry participants still believe that the dip in prices is short-lived and will go into reverse in earnest as inflation and interest rates fall back toward the levels seen in the first two decades of this century. With a shortfall of new construction of homes estimated at up to 4,500 a year, demand appears set to continue to exceed supply for the foreseeable future.

Of course, Luxembourg is atypical of European residential property markets – a small, extremely prosperous country whose economy is mostly based on services, closely interlinked with neighbouring regions, and where almost half of the national workforce commutes in daily from other countries. These factors endow the housing market with intrinsic buoyancy – which has extended to a lesser degree to neighbouring areas of Belgium, France and Germany.

Impact of inflation

Some of the factors that influenced the hiatus in the long housing market boom also apply to other European countries. In April 2023 the International Monetary Fund warned in its regional economic outlook of the risk of home price corrections across the continent linked to both the impact of inflation levels unprecedented since the 1990s and the raising of interest rates by central banks to heights also unseen for decades to bring rising consumer prices back under control.

The IMF said downward trends were already visible in some European housing markets, including the Czech Republic and Denmark; in Sweden residential property prices declined by more than 6% in 2022. Although interest rates are now declining from their peak, housing markets in some countries could continue to struggle even if there is no broader financial distress within their economies.

Although markets may see longer-term inflation risks receding, mortgage lenders have become significantly more conservative. In the longer term this might have a broader economic impact by lowering households’ assessment of their own wealth and financial outlook, lowering personal expenditure and acting as a brake on economic activity overall.

Average home prices in the EU were up by 5.4% year on year in the second quarter of 2025. Luxembourg saw a rebound of 4.6%.

According to Eurostat, average home prices in the EU were up by 5.4% year on year in the second quarter of 2025. Luxembourg saw a rebound of 4.6%; Finland was the only member state to experience a decline, of 1.3%. At the other end of the scale, average prices were up by 17.2% from a year earlier in Portugal, 15.5% in Bulgaria, 15.1% in Hungary, 13.2% in Croatia and 12.8% in Spain.

Vicious circle?

In the IMF’s most recent report on monetary policy and housing overvaluation, in October 2025, its analysts warned that interest rate changes had an exaggerated impact on prices and on demand from investment property purchasers. Drawing on US data, the authors say home prices respond more strongly to interest rate changes in overvalued markets, while investor demand – using purchases by non-owner-occupiers as a proxy – declined more sharply after monetary policy tightening.

Other European countries have experienced rapid home price growth over the past three decades – 176% between 1996 and 2021 in Sweden, 145% in the UK, 142% in Denmark and 126% in France, according to the Organisation for Economic Co-operation and Development.

But in other countries growth was much more modest – 31% in Germany (where until 2016 prices were lower than in 1996), 27% in Portugal (where recent growth is attributed in part to its now-abolished Golden Visa scheme to attract wealthy residents with tax breaks) and just 9% in Italy.

Rating agency S&P Global concluded in 2023 that the long period of price growth appeared to be coming to an end, forecasting a decline in most European countries. However, by January 2024 S&P was upgrading its housing price forecasts because of buoyancy in European markets led by the UK, Ireland, Spain and Portugal. It says supply factors such as the continuing high cost of building materials have been a key factor in the price resilience of residential property, alongside a resurgent labour market, backlog of home construction, and government financial support measures.

Steady rental prices

Although residential property construction has been holding up well in some European countries – although not in France, Sweden, Germany or Luxembourg – S&P says construction is a lagging indicator of the housing market, given the length of time between housing starts and completion.

An important factor for residential property investors is that rental values have remained much steadier than purchase prices over the past decade.

An important factor for residential property investors is that rental values have remained much steadier than purchase prices over the past decade. Eurostat says average rents across the EU increased by 3.2% over the 12 months to the second quarter of 2025, and were up on average 28.8% since 2010, compared with 60.5% for home purchase prices.

What does this mean for property investors? Forecasters suggest that there is little likelihood of a Europe-wide surge in home prices – and therefore of substantial capital gains – on the scale of that seen in the 2010s, at least not in the immediate future. However, a large-scale drop in rental returns also appears unlikely since they have not outstripped overall economic growth in the same way as purchase prices. And a drop in housing sales could push more people toward renting rather than purchasing property, boosting demand.

In the long term, investment in residential property is set to remain popular simply because – eventually – supply and demand factors are likely to bring prices back into equilibrium, and rents can deliver the steady returns that many investors seek. But the days when purchases of houses and apartments were a one-way bet appear to be over, at least for now.