The housing market has important macroeconomic and macroprudential implications for the euro area economy. In view of the duration of the ongoing upturn in euro area house prices and residential investment, which started at the end of 2013, analysing the state of the housing market is particularly informative. This article discusses the ongoing housing market upturn, from a chronological and fundamental perspective. It also explores a selected set of indicators that can potentially inform on the state of the housing market, elaborating on the demand and supply factors underpinning the current upturn, as well as their relative importance.
The euro area housing market has been in an upturn since the end of 2013 and is in a relatively advanced state of the cycle in terms of duration.
House prices have surpassed their pre-crisis peaks, while residential investment is still significantly below. The state of the euro area housing market is, so far, not characterised by generalised investment activity or house price levels above their fundamentals. However, considerable heterogeneity in developments across and within countries makes the overall assessment more challenging.
The housing market upturn is expected to continue but at a more moderate pace.
This reflects expectations in currently available forecasts and projections that the euro area economic expansion will continue, reflecting the favourable impact of the very accommodative stance of monetary policy, improving labour market conditions and stronger balance sheets. This context generates income and financing conditions conducive to housing demand. Lending to households for house purchase is also expected to remain dynamic in the coming years. Nevertheless, in line with the expected slowdown in the pace of economic activity, the rate of expansion in the housing market is also expected to moderate. A moderation in residential investment might also emerge from the increasing presence of supply-side constraints in some euro area countries, which may currently be more binding than in the respective economies as a whole. These constraints could however mitigate the envisaged moderation in house prices.
Monitoring a broad set of housing-related indicators is key to assessing the macroeconomic and macroprudential implications of the housing market.
To fully assess the state of the housing market it is necessary to look at both the major demand and supply determinants and their interactions. Moreover, given the extended interactions between real and financial variables, a broader set of indicators – some of which were discussed in this article – that goes beyond house prices and residential investment (such as loan developments, house price valuation, household balance sheets, etc.) should be continuously monitored to fully understand the macroeconomic and macroprudential implications of the ongoing housing upturn.
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