Euro Area Housing Markets: Trends, Challenges and Policy Responses

The paper discusses the relevance of housing markets for macroeconomic developments from a euro area perspective, reviews trends in house prices and mortgage credit, and discusses policy approaches to prevent housing booms and deal with busts. After years of unsustainably strong house price growth in several Member States in a context of easing credit conditions, downward house price corrections took place after the 2008 financial crisis. A recovery in house prices started after 2013 under different conditions compared with the pre-financial crisis context. The house price recovery appeared to be driven to a greater extent by structural factors and to a lesser extent by buoyant household loans, as credit growth has been lagging behind house price growth in most countries. Prospects for house price growth after the COVID-19 outburst are clouded by uncertainty in light of the changing outlook when economic fundamentals and policy responses play in opposite directions. The current context is also diffeent compared with the period before the global financial crisis because macro-prudential frameworks have been strengthened and macroprudential tools are increasingly used across the euro area. The effectiveness of policy tools needed to address risks linked to boom-bust dynamics in the real estate sector depends on their interaction, design and timely implementation. Policy composition and policy design also appear crucial in dealing with possible trade-offs among policy objectives, including between macro-financial stability and housing affordability.