Europe's Housing Market Is Simmering, Not Bubbling

(Bloomberg) -- House prices in the euro area seem to only know one way: Up.

The inflation-adjusted annual expansion in property values has move above longer-term averages, the European Central Bank said in its Economic Bulletin. But with the recovery in real estate prices at a “fairly early stage,” there are currently no signs of a bubble, it argued.

“Valuation measures applied to euro-area aggregate data suggest that prices are currently broadly in line with fundamentals and show no signs of the excess seen in 2007,” the Frankfurt-based institution said. “However, this aggregate perspective does not rule out excessive valuations and corresponding vulnerabilities at the country or regional level, especially when house price dynamics are combined with strong mortgage growth and high leverage.”

Record-low interest rates and unconventional stimulus has pushed down borrowing costs across the region, raising questions of whether the real estate market may inadvertently overheat once again. Officials and regulators tasked with maintaining financial stability are sensitive to rapid price developments, not least because of the consequences observed after the housing market collapsed in Spain and Ireland when the global economy slowed in 2008.

House prices increased 3 percent in the second quarter after 2.7 percent in the first and 2.2 percent in the final three months of 2015, according to the central bank's aggregate residential property price indicator.

“In the context of the current low yield environment and the related ongoing search for yield, such vulnerabilities should be carefully monitored,” the ECB said.

Germany, which did not experience a property market slump during the crisis, is readying measures to prevent overheating as residents of the bloc's largest economy buy homes at the fastest rate in decades. Prices in cities including Berlin, Hamburg and Munich surged by more than 30 percent in five years.

“While I currently see no sign of exuberance in the real estate market in the euro area as a whole, there's no denying that some national markets are at risk of overheating,” Bundesbank President Jens Weidmann said in a speech on Thursday.

Germany, Estonia, Ireland, Luxembourg, Austria and Portugal are among the countries that have experienced the highest annual growth rates in nominal house prices since early 2014, according to the ECB. Average growth has remained negative in Greece, Italy and Cyprus.

To contact the author of this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net.

To contact the editor responsible for this story: Jana Randow at jrandow@bloomberg.net, Jeff Black