Forecasting house prices in the euro area

In this report we explain our forecasts for house prices in the four biggest euro area countries. Our house price model expresses a “strong view” of house price evolution over next 6 to 8 quarters. Yet, relying entirely on the model ’ s results would likely overlook/neglect other relevant attributes of the housing market. Thus, we discuss in this report the model’ s results and suggest alternative forecasts, which are somewhat less “extreme”. This exercise is highly pertinent as the ECB is expected to ease monetary conditions as soon as in June and we find that interest rates are statistically significant in all four major euro area countries. An anticipated cumulative 125bps rate cut by the ECB will quickly turn the German market around. T he biggest part of the downward adjustment i n the housing market seems to be now behind us. The property values have come close r in line with market’s fundamentals. Also, constrained supply will be adding upward pressure . In France, elevated credit costs and high property values undermine affordability, implying a further decline in house price s. There has been a protracted response of house prices to rate hikes, suggesting that the worst is still ahead of us. We are cautiously more positive given, unknown by the model, supply side constraints. In Spain, a “delayed” response of house prices to higher cost of debt could destabilize housing market . On the other hand, the housing stock remains constrained and foreign demand i s set to strengthen. The Ital ian housing market will avoid a price deflation as increases in interest rates have not been big enough to dampen demand completely a s properties in some regions remain highly affordable .