Developments in the recent euro area house price cycle

This article reviews developments in the euro area housing market during the recent house price cycle and compares them with previous cycles. The recent downturn in house prices was relatively mild and short-lived, as well as less pervasive, compared with the global financial crisis and the sovereign debt crisis and implied smaller adjustments to overvaluations. This limited decline in house prices effectively unwound the exceptional pandemic-related surge in housing demand and, therefore, did not bear the same hallmarks as an outright recession. This is because income remained solid owing to the favourable labour market conditions and excess savings had also accumulated during the pandemic. The role of tighter financing conditions in the adjustment of house prices was mitigated by relatively sound balance sheet positions, reflecting the macroprudential measures undertaken in the aftermath of the global financial crisis, a stronger prevalence of fixed rate mortgages and links between the housing and the rental market. With the combination of prevailing supply-side shortages and continuing sound demand fundamentals, house price developments may well continue on their upward path but still remain uncertain.