House prices are now overvalued in over half of euro area countries, says the European Commission in a report on housing market developments published on Monday 26 September.
Among the nineteen euro area countries, the only ones not concerned are Cyprus, Finland, Latvia, Italy and Ireland, although for the latter Member State, the European institution points out that property prices are traditionally high and wage growth very dynamic.
For the others, Luxembourg clearly stands out, with an estimated overvaluation of real estate of around 60%. In Austria the overvaluation is 30% and in Germany, Belgium, France, the Netherlands and Portugal it is 20%.
According to the Commission’s report, house price growth has gradually strengthened, especially during the Covid-19 pandemic, reaching “a cumulative increase of 40%” between the end of 2012 and the third quarter of 2021. This is “four times higher” than inflation over the same period.
Here again, there are significant national disparities over the period analysed. The Baltic States, Luxembourg, Ireland and Portugal show a cumulative growth of more than 70%. In Germany, property prices are some 70% higher than at the end of 2012, compared with 30% in Spain and 20% in France. In contrast, prices fell in Italy (-7%), and remained stable in Greece and Cyprus.
The fact that, during the pandemic, demand for housing held up is an “unexpected” development, the Commission notes. This is “largely” due to the emergency support for household incomes, introduced despite the fall in GDP. At the same time, savings accumulated during periods of lockdown as well as changes in behaviour (e.g. remote working) have helped to stimulate demand for housing. In contrast, the EU institution notes that since the pandemic, house prices have risen “much faster” than incomes.
The ECB’s interest rate hike, which is tightening financing conditions for economic operators, will have an impact on the real estate markets. In particular, a more inflationary environment may affect housing affordability for homeowners with variable rate mortgages through higher interest payments. At the same time, the normalisation of the ECB’s monetary policy could rebalance house prices, as future homeowners will be less able to pay high prices. The resulting decline in demand would reduce the value of existing homeowners’ assets and thus reduce household wealth.
The report also analyses the impact of public policies at national level on housing affordability. “Policy makers tend to favour policies that support housing demand over those that encourage supply. The result is often an increase in prices and a deterioration, rather than an improvement, in housing affordability”, the Commission believes. It is therefore “best to take effective supply-side measures”, although demand-side measures can play a role, if they are “more targeted at vulnerable groups”.
See the Commission’s report: https://aeur.eu/f/39u (Original version in French by Mathieu Bion)