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What drives house prices in Europe?

Author

Listed:
  • Federica Ciocchetta

    (Bank of Italy)

  • Elisa Guglielminetti

    (Bank of Italy)

  • Alessandro Mistretta

    (Bank of Italy)

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.

Suggested Citation

  • Federica Ciocchetta & Elisa Guglielminetti & Alessandro Mistretta, 2023. "What drives house prices in Europe?," Questioni di Economia e Finanza (Occasional Papers) 764, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_764_23
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    References listed on IDEAS

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    More about this item

    Keywords

    house prices; Error Correction Model (ECM); over-valuation; housing bubbles;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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