Germany and Spain: A tale of two housing markets facing hard choices
Wednesday, 27 May 2025
Housing affordability is climbing fast on the political agenda in Europe—and with good reason. From rent surges to sluggish construction and growing social tensions, both Germany and Spain are facing formidable housing challenges. But while their national contexts differ, their experiences offer valuable lessons for policymakers grappling with similar pressures across the continent.
In a recent episode of the Future is Blue podcast, we spoke with Konstantin A. Kholodilin, researcher at the German Institute for Economic Research (DIW Berlin), and Miguel Ángel González Simón, economist at Funcas, to explore how the two countries compare—and what they can learn from each other.
[You can access here the podcast episode]A Market in Flux
Germany’s housing market has been on a rollercoaster. As Konstantin explained, “We had the longest and perhaps the biggest house price boom in Germany starting from around 2009, with prices nearly doubling nationally and even more in large cities.” But that boom came to an abrupt halt between late 2021 and early 2022, coinciding with rising interest rates and economic uncertainty.
While sales and mortgage activity declined sharply during that period, signs of recovery emerged last year. “Prices, mortgage volumes, and sales are now picking up again,” said Konstantin. “But they haven’t yet returned to pre-2021 levels.”
In Spain, the dynamic is slightly different. Miguel Ángel noted that the country has remained on an upward trajectory since the COVID-19 pandemic. “There’s been strong transaction volume and rising demand and prices,” he said. This imbalance is striking: in 2025, for every 100 new houses built in Spain, about 200 new households will be formed, contributing to the already-existing housing deficit.
Foreign investment, household formation, and improved macroeconomic conditions are driving demand, while supply struggles to keep pace. “This is reflected in a high housing cost overburden rate and an expansion of demand beyond the big cities,” Miguel Ángel added.
Policy Responses: Mixed Results
In Germany, rent control measures have long been part of the political toolkit. The most recent chapter began in 2015 with the introduction of the “Mietpreisbremse” or rental price brake. “It inspired similar legislation in Catalonia in 2020 and later across Spain in 2023,” Konstantin explained.
Under the law, rental price increases in tight housing markets are capped at 10% above the average rent for comparable properties, as defined by official rent indices. Further limits restrict rent hikes to 15% over three years. While such controls may offer short-term relief, their effectiveness remains a topic of debate.
“Studies show rent controls do reduce prices in regulated areas,” Konstantin said. “But they also lead to faster rent increases in unregulated segments, a decline in construction, and a deterioration in housing quality.”
Spain’s approach has been similarly cautious but lacks consistent investment. As Miguel Ángel pointed out, “Since the financial crisis, public investment in housing has been very low.” Policies have focused more on demand-side solutions, leaving supply-side incentives underdeveloped.
One new initiative involves ICO, a state-owned financial institution, providing support to help certain groups access housing. But this, too, may not be enough. “Rent control needs to be carefully designed,” Miguel Ángel stressed. “Otherwise, it can disincentivize new supply, which is exactly what we need more of.”
Construction: The Critical Bottleneck
A consistent theme in both countries is a lagging construction sector. In Germany, the goal of building 400,000 new homes per year has never been met. “We peaked at 300,000 before the pandemic,” Konstantin explained. “And since 2020, construction has stagnated. An abrupt decline of 15% took place in 2024..”
Multiple factors are to blame: rising interest rates, inflation, skyrocketing construction costs, and economic uncertainty. And while rent control may contribute to reduced investment, Konstantin was cautious about drawing a direct causal link. “It’s speculation. Many factors play a role—rent caps, yes, but also the pandemic, inflation, and input costs.”
Spain faces a similar challenge. While construction rates have risen recently, they remain inadequate to meet demand. “A larger push is needed to compensate for demographic pressures,” Miguel Ángel said.
Strategic Outlook: Looking Ahead
Both countries face long-term structural challenges. Germany is dealing with an aging population, shrinking household sizes, and persistent migration flows. “Average household size has fallen from three people in 1960 to less than two today,” Konstantin noted. “This means more households are demanding smaller, separate dwellings—yet most of our housing stock was built for larger families.”
Meanwhile, Spain’s affordability crisis is highly localized. “Madrid, Barcelona, Alicante, and Valencia account for around 50% of the housing deficit,” Miguel Ángel observed. “That’s where policy should focus.” He also called for regulatory reform, citing the Netherlands as a model for efficient land use and permitting processes. “In Spain, different regional authorities impose different technical standards, which complicates development.”
Miguel Ángel also stressed the need for coordination: “We need a framework to align housing efforts across all levels of government and between public and private actors. In France, for instance, municipalities are fined if they don’t meet affordable housing targets.”
Lessons for Europe
For Konstantin, the key takeaway is coherence. “There’s a lack of coordination between different levels and types of policies,” he said. “One arm of government introduces rent control while another raises transaction taxes or restricts land use. These contradictions reduce the effectiveness of policy overall.”
Miguel Ángel agreed. “If labor and financial markets don’t function well, it’s very difficult to solve housing problems. An integrated, well-coordinated approach is crucial.”
As housing pressures mount across Europe, Germany and Spain offer important insights—and stark warnings. Affordability cannot be solved with isolated measures or short-term fixes. It requires coordinated policy, strategic investment, and a focus on both supply and demand.
[You can access here the podcast episode]Carlos Carnicero Urabayen