Analysing euro area house price developments

Unsustainable dynamics in housing markets and house prices have been one of the root causes of the 2008 financial crisis. They emphasised the challenge for policy-makers to identify such dynamics in the context of their regular and systemic analyses of economic, financial and monetary developments. This paper gives an overview of a framework for analysing house price developments in the euro area. Analysing house prices for various purposes includes the ability to explain developments, to form expectations of their likely future path, and to evaluate them in terms of their sustainability. These different ambitions suggest that it can be very difficult to find single best and all-encompassing tools, and that, in practice, the analysis of house prices may have to rely on different tools for different purposes. For the euro area, an additional challenge exists in the heterogeneity of housing markets across euro area member states. Together with the relatively long duration of house price cycles compared to economic growth cycles, this implies that at different points in time house price developments can be characterised by considerably less synchronisation across countries than other economic developments. In this respect, the unsustainable nature of house price developments prior to the financial crisis has been a pervasive feature of some member states but not of others.