What drives house prices in Europe?

Federica Ciocchetta (), Elisa Guglielminetti and Alessandro Mistretta
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Federica Ciocchetta: Bank of Italy

No 764, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Boom-and-bust cycles in the housing market pose a threat to macroeconomic and financial stability, thus calling for a timely assessment of imbalances. This work sheds light on the drivers of house price dynamics in some euro area economies, investigating whether the increases in house prices underway since 2015 signal a risk of overheating. We show that an Error-Correction-Model (ECM) featuring a long-run relationship between house prices and income and short-run effects of interest rates and housing supply fits the data well in most cases. We then propose a novel model-based misalignment indicator that consists in the difference between actual and predicted house prices once we have removed the component relating to extrapolative house price expectations (bubble-builder component). We find that, in 2021 (the last year in our analysis), prices were slightly undervalued in Italy and Ireland, moderately overvalued in France and Belgium, and significantly overvalued in Spain and Germany. Despite some quantitative differences, our results are broadly in line with the assessment of the European Central Bank.

Keywords: house prices; Error Correction Model (ECM); over-valuation; housing bubbles (search for similar items in EconPapers)
JEL-codes: C22 C51 C52 R21 R31 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-eec, nep-mac and nep-ure
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Related works:
Journal Article: What Drives House Prices in Europe? (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_764_23

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