EU Economy - The upturn in euro area house prices has continued in the first half of this year - The annual growth rate in euro area house prices was 3.0% in the second quarter of 2016 .. - ECB

Publication -  Recent developments in euro area residential property prices (Economic Bulletin Issue 7, 2016)

Recent developments in euro area residential property prices

The upturn in euro area house prices has continued in the first half of this year. According to the ECB’s aggregate residential property price indicator, the annual growth rate in euro area house prices was 3.0% in the second quarter of 2016, up from 2.7% in the previous quarter and 2.2% in the last quarter of 2015.19 

This points to a continuation of the upturn that started in early 2014 after the house price index reached a low (see Chart A). The annual growth rates are now back to the longer-term average.20 Measured in real terms – here adjusting house prices with the GDP deflator as a measure of underlying inflation – annual real house price growth has in fact moved above longer-term averages.

Developments in euro area residential property prices are still heterogeneous across countries, but the differences are narrowing. The dispersion appears to have diminished over time, reflecting the fading-out of adjustments and corrections in housing markets in a number of countries after the 2007-08 financial crisis. This narrowing dispersion not only reflects the fact that fewer countries have recorded extreme high or low growth rates than previously, but also that the core of the distribution of residential property price growth rates is more compact (see Chart B).

 Nevertheless, the upturn in house prices has been taking place at different growth rates across countries. Looking beyond shorter-term volatility in house price growth, countries that have been at the upper end of the spectrum of average annual growth rates in nominal house prices since early 2014 include Germany, Estonia, Ireland, Luxembourg, Austria and Portugal (see Chart C).

 Overall, this upturn is currently supported by strong growth both in countries that did not experience a collapse in the housing market in the aftermath of the financial crisis (e.g. Germany, Austria) and in countries that did suffer from such a bust but that have in the meantime seen corrections that facilitate a recovery going forward (e.g. Ireland, Spain, Latvia and Lithuania). In Greece, Italy and Cyprus, however, average growth has remained negative even after 2014.

The current recovery has lasted for just over two years and so is still at a fairly early stage. The average duration of major upturns in historical data is close to nine years.21 Upturns in house price cycles have often come to an end because expansions developed into outright booms with unsustainable valuations. Valuation measures applied to euro area aggregate data suggest that prices are currently broadly in line with fundamentals and show no signs of the excess seen in 2007, i.e. at the end of the previous major upturn (see Chart D).22 

However, this aggregate perspective does not rule out excessive valuations and corresponding vulnerabilities at the country or regional level, especially when house price dynamics are combined with strong mortgage growth and high leverage. In the context of the current lowyield environment and the related ongoing search for yield, such vulnerabilities should be carefully monitored.

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