Soaring property prices in Europe are back in the spotlight
The house price boom is accelerating, with some national variations
Eurozone house prices rose 8.8% year-on-year in the third quarter of 2021, up two percentage points from the previous quarter and the fastest growth rate in the history of the series (dating back to 2005).
The year-on-year rate of increase has accelerated in seven of the past eight quarters. Unlike some other indicators, the exceptionally high year-on-year house price growth rates are not the result of base effects. The quarterly increase in the third quarter of 2021 was 3.3%, following a 2.6% gain in the previous quarter, the largest consecutive increases on record.
The strength of the third quarter 2021 data was widespread across most of the euro area, with nine of the eighteen member states for which data is available (Greece being the exception) posting double-digit annual increases.
Of these, the largest year-on-year increases in the third quarter of 2021 were observed in Lithuania (18.9%), Estonia (17.3%) and the Netherlands (16.8%). The lowest were in Cyprus (2.2%), Spain (4.2%) and Italy (also 4.2%).
In general, though not uniformly, there has been a split between house price dynamics in the more northern Member States and those in the south, with the latter suffering lasting damage in the period following the global financial crisis as the bubbles that formed beforehand burst with devastating consequences. Yet, although relatively low, even in southern Member States, the year-on-year rates of increase in house prices have also accelerated in recent quarters.
Outside the euro area, annual house price increases were also exceptionally high in many EU Member States in the third quarter of 2021, notably in Czechia (22.0%), Iceland (13.7% ) and Hungary (12.9%).
Price pressures due to the pandemic
Rising house prices are not a recent development in the euro zone. Prices have increased on a quarterly basis since the beginning of 2015, in line with a very accommodative monetary policy, reflected by historically low interest rates and favorable credit conditions.
What is relatively new is the acceleration in the pace of house price increases in many Member States since the onset of the COVID-19 pandemic, as demand for housing has strengthened as monetary policy remained ultra-stimulating.
For the euro area as a whole, the increase in house prices since the fourth quarter of 2019 is more than 13%. Cumulative gains were much larger in many northern Member States, exceeding 25% in Luxembourg and Lithuania and 20% in the Netherlands and Austria, with Germany not far behind.
In southern Member States, equivalent increases have generally been lower, with a few exceptions, including Portugal (up almost 17%).
Stability risks persist
In a recent special report, we examined the drivers of past and future house price growth in the euro area and the EU, concluding that a moderation in house price inflation was likely due to the improvement of the macroprudential framework in Europe, the increase in housing supply and the trough outside of interest rates.
Yet, some countries seem more vulnerable than others to a boom and bust scenario due to excessive price growth and high household debt. IHS Markit’s housing market “heat” index highlighted particular vulnerabilities in Luxembourg, Sweden, the Netherlands, Czechia and Denmark.
The higher rates of increase in house prices in the euro area and the EU during the pandemic have generally been accompanied by an increase in the growth of household mortgages. However, bank lending data has started to show signs of slowing in recent months. In six of the eleven largest euro area member states, year-on-year rates of increase in household mortgage lending in November 2021 had slowed from peaks in previous months.
Recent data from the ECB’s Quarterly Eurozone Bank Lending Survey (BLS) also underscores that standards for mortgage lending to households are also being tightened.
As regards the implications for monetary policy, soaring house prices in the euro area and broader asset price inflation have been a concern within the Governing Council of the ECB for some time, exacerbated more recently by concerns about very high rates of consumer price inflation.
This has led to a reduction in the ECB’s net asset purchases, although they are yet to continue until at least October 2022. The bar for key rate hikes has also been set quite high. This suggests that the likelihood of drastic action by the ECB to combat the property price boom remains rather low in the near term, implying heightened risks for long-term stability.