Stabilising and Destabilising Factors in 14 EU Housing Markets

In Europe, residential properties represent a large part of an economy’s overall net worth. They constitute important assets and liabilities for both credit institutes and private households. As a result, significant changes in residential property prices not only exert an influence on developments in the housing market itself, but also have noticeable macro-economic consequences. Via their effect on net worth, capital costs, balance sheets and the expectations of economic agents, they influence private consumption, the private demand for capital goods and the stability of the financial markets. The present essay is a condensed version of a similarly entitled study that was commissioned in 2011 by the Austrian Federation of Limited-Profit Housing Associations. The study examines housing market developments in fourteen countries of the EU between the years 1995 and 2007 (the start of the crisis in the banking, finance and economic sectors), as well as during the time thereafter, up until the end of 2011. It focuses on how house prices developed in comparison to housing investments during these two periods. In most of the countries, the development of the two core housing market indicators was in some respects similar, although in others they displayed great deal of divergence. An examination will be made of how well the development of these two indicators in the individual countries can be explained in terms of the development of incomes, interest rates, demographics and other influential factors. One important element of this is the description of the changes that took place on the financial markets. Further investigation is devoted to taxes, subsidies and other public policies related to housing, as well as to transaction costs in the housing markets and changes in tenure structure and the housing mix. The conclusion of the present essay comprises an attempt to identify the actual stabilising and destabilising factors by making a comparison of the countries. On the one hand, this involves an analysis of the mispricing that occurred on some of the markets, both at the time of the outbreak of the financial crisis and afterwards. On the other hand, an analysis is made of the institutional features of three groups of countries, classified according to the development of their house prices over the whole period of study, up until the end of 2011.