What drives European housing prices?

One contributing factor to the financial crisis in Europe were housing bubbles in several countries . T he most affected countries were Ireland, Greece, Spain and Denmark. A period of strong price increases driven by speculative activities was followed by an abrupt drop in prices during the crisis. Housing price recovery took place from around 2014 onwards, with prices rebounding close to or even slightly above pre-crisis levels. Meanwhile, Euro area residential construction has regained strength only from around 2016 onwards , with levels still being muted , due to limited construction activity in the peripheral countries . T he recent acceleration in housing prices is suggestive of a demand-supply gap . Yet, one cannot rule out the possibility of a gradual formation of new speculative bubbles amid a decade long ultra-low interest rate environment. While supply and demand fundamentals explain to a large extent the rise in prices, the price movements c ould be also a result of a self-directed circle based on self-fulfilling predictions . In this Special Report , we analyze the drivers behind the rise in real estate prices in Europe and growing imbalances in the real estate market s . Finally, we look at the macroprudential measures taken by some authorities with the aim of limit ing risks associated with over-heating real estate markets. Overall, one should expect more macroprudential measures to be adopted in Europe to contain unwarranted demand fueled by “cheap” credit given that interest rates will remain at a very low level for an extended period. Overall, price developments still seem to be mostly within the “fundamental” range. But it is also clear that this assessment depends crucially on the assumption that interest rates will remain very low for an extended period of time .