Will euro area house prices sharply decrease?

The long-termeuro area house price equilibriumand its short-termdynamics are estimated bymeans of a panel error correction model. The estimates show that the short-term dynamics are essentially driven by the autoregressive term (persistence), disposable income and mortgage loans, whereas interest rates have little effect. The long-termhouse price equilibriumismainly driven on the demand side by disposable income, interest rates, and mortgage loans, whereas costs (mostly land) drive the equilibrium on the supply side. The unprecedented long-lasting boom in house prices from 1997 to 2007 is thus essentially explained by a favourable macroeconomic development caused by the EMU effect and a glut of global savings. The bust phase of euro area house prices began in 2007, and the current house price might return to its equilibrium level in 2014. According to themost realistic scenario, euro area house prices will experience a smooth and soft landing in 2016 and then begin an increasing phase thatwill be pulled upwards by a higher equilibriumprice.However, a deflationary scenario cannot be excluded if the current credit squeeze is not solved, particularly in the peripheral euro areamember states.

OTT Herve; 

2014-10-20

ELSEVIER SCIENCE BV

JRC58807

0264-9993,   

http://www.sciencedirect.com/science/article/pii/S0264999314002259,    https://publications.jrc.ec.europa.eu/repository/handle/JRC58807,   

10.1016/j.econmod.2014.06.004,