This paper studies the drivers of house price dynamics in a range of European countries, based on an econometric model in which house prices depend on household disposable income, interest rates on mortgages, housing supply and expectations about the future value of real estate properties. The model makes it possible to build an indicator of the deviation of house prices from their fundamental values, signalling potential risks for financial stability.
Residential properties were found to be slightly undervalued in Italy and Ireland, moderately overvalued in France and Belgium, and significantly overvalued in Spain and Germany at the end of 2021, in line with the assessment of the European Central Bank and the European Systemic Risk Board. Moreover, the model indicates that expectations about the future value of real estate properties play an important role in the build-up of speculative bubbles.
