The start of a new cycle: Recent housing price dynamics in Europe and their macroeconomic implications

After a slump between 2007 and 2013, real house prices in Europe are bottoming out and, in cases, rebounding at accelerating speed. While important in absolute terms, the magnitude of the correction experienced is generally limited when compared to the cumulated growth during the pre-crisis boom so that house prices in most Member States remain close to the peak values reached in 2007-2008. This could suggest that in some cases, further downward correction may be expected. Meanwhile, in a number of countries, recent house price increases have been substantial, reaching more than 5% per annum. The analysis of vulnerabilities linked to residential real estate markets is an essential part of the macroeconomic imbalances procedure (MIP). The risks of over-valuation on the housing market are gauged using a variety of indicators and models which compare house price developments with the underlying fundamentals. These tools paint a contrasted picture of house price developments in the euro area. In some countries, notably Belgium, Luxembourg and Austria, house prices are increasing from an already high level compared to fundamentals. This warrants a detailed analysis of potential risks in the upcoming country reports in the context of the European Semester. By contrast, a majority of the euro area countries with recent strong price increases do not show clear signs of over-valuation. Beyond prices, a number of factors need to be taken into account when assessing vulnerabilities on the residential real estate market. In particular, the strength of households' balance sheet and the health of the banking sector are important qualifiers. In countries like the Netherland and Finland, the high household indebtedness could represent a vulnerability in the event of a downward house price correction. The section provides a historical comparison of the current cycle with previous house price cycles. It analyses the current recovery in housing markets and assesses the extent to which risks are building up again.