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Nine of the eurozone's member states experienced double-digit
y/y rates of increase in house prices in Q3 2021.
Cumulative increases in house prices since the start of the
pandemic have exceeded 20% in several member states.
Various factors point to a moderation in house price dynamics,
including the tightening of credit standards for household mortgage
loans.
But with monetary policy accommodation to be unwound only
gradually, concerns over long-term stability risks are likely to
persist.
House price surge steps up, with some national variations
House prices in the eurozone increased by 8.8% y/y in Q3 2021,
up by two percentage points versus the prior quarter and the
fastest rate of increase in the series' history (which goes back to
2005).
The y/y rate of increase has picked up in seven of the past
eight quarters. Unlike some other indicators, the exceptionally
strong y/y rates of increases in house prices are not a result of
base effects. Q3 2021's q/q increase was 3.3%, following a 2.6%
gain the prior quarter, the biggest back-to-back increases on
record.
The strength in Q3 2021's data was broad-based across most of
the eurozone, with nine of the eighteen member states for which
data are available (Greece is the exception) showing y/y increases
in double digits.
Of these, the highest y/y increases in Q3 2021 were in Lithuania
(18.9%), Estonia (17.3%), and the Netherlands (16.8%). The lowest
were in Cyprus (2.2%), Spain (4.2%) and Italy (also 4.2%).
In general, though not uniformly, there has been a divide
between house price dynamics in the more northerly member states
and those in the south, with the latter having suffered lasting
damage in the period after the post-Global Financial Crisis as the
bubbles which built up beforehand burst with devastating
consequences. Still, while comparatively low, even in the southern
member states, y/y rates of increase in house prices have also been
picking up in recent quarters.
Outside the eurozone, y/y house price increases were also
exceptionally elevated in many EU member states in Q3 2021,
including in Czechia (22.0%), Iceland (13.7%) and Hungary
(12.9%).
Pandemic-driven price pressures
Rising house prices are not a recent development in the
eurozone. Prices have been increasing on a q/q basis since the
start of 2015, consistent with very accommodative monetary policy,
reflected in record low-interest rates and favorable credit
conditions.
What is relatively new is the acceleration in the pace of the
house price increases in many member states since the start of the
COVID-19 pandemic, as demand for accommodation has strengthened
while monetary policy has remained ultra-stimulative.
For the eurozone overall, the increase in house prices since Q4
2019 is over 13%. The cumulative gains have been much larger in
many northern member states, exceeding 25% in Luxembourg and
Lithuania and 20% in the Netherlands and Austria, with Germany not
far behind.
In the southern member states, the equivalent increases have
generally been smaller, though there are some exceptions, including
Portugal (up by almost 17%).
Stability risks to persist
In a recent Special Report, we looked at the drivers of past and
future house price growth in the eurozone and EU, concluding that a
moderation in house price inflation was likely given the improved
macroprudential framework in Europe, increased supply of housing,
and the bottoming out of interest rates.
Still, some countries look more vulnerable than others to a
'boom and bust' scenario due to excessive price growth and high
household debt. IHS Markit's housing market 'heat' index
highlighted particular vulnerabilities in Luxembourg, Sweden, the
Netherlands, Czechia, and Denmark.
The higher rates of increase in house prices across the eurozone
and EU during the pandemic have generally been accompanied by
rising of household mortgage lending growth. However, bank lending
data have started to show some signs of cooling off in recent
months. In six of the eurozone's largest eleven member states, the
y/y rates of increase in household mortgage lending in November
2021 had slowed compared to prior months' peaks.
Recent data from the ECB's quarterly eurozone bank lending
survey (BLS) also highlight that credit standards for household
loans for mortgage purposes are also being tightened.
Regarding the monetary policy implications, the surge in
eurozone house prices, and broader inflation of asset prices, have
been generating concern on the ECB's Governing Council for some
time, exacerbated more recently by worries about very elevated
consumer price inflation rates.
This has resulted in a scaling back of the ECB's net asset
purchases, though they are still scheduled to continue until at
least October 2022. The bar for policy rate hikes has also been set
rather high. This suggests that the likelihood of radical ECB
action to tackle the boom in house prices remains rather low
near-term, implying heightened stability risks in the
long-term.
Posted 24 January 2022 by Ken Wattret, Vice President, Economics, S&P Global Market Intelligence
