Assessing the dynamics of house prices in the euro area

This focus section presents a housing market imbalance ëtoolkití to identify unsustainable housing market developments early on. It combines a house price cycle analysis and a range of valuation methods. The house price cycle analysis identifies over- or under-valuation of house prices by comparing actual prices with an estimated filtered trend, and then detecting local peaks and troughs. Unsustainable developments (boom/bust episodes) are separated from milder cyclical ups (bull phase) and downs (bear phase) by looking at their amplitude and duration (and severity as a combination of both dimensions). As a result, Member States can be grouped according to any unsustainable developments identified in the last upswing as those with: (i) long and ample booms, (ii) sudden and sharp booming periods, (iii) long and mild developments above the trend, with lower average house price growth rates and, (iv) no identified booming episodes. The outcome of the cyclical analysis is supplemented with valuation methods to obtain confirmation signals coming from affordability and price-to-rental ratios as well as equilibrium house price estimates based on economic fundamentals, such as total population, real disposable income and long-term interest rates. None of the methods used is exempt from caveats and technical challenges but the combination of all the relevant dimensions allows a comprehensive approach.