THE RISK TO RESIDENTIAL PROPERTY PRICES
Based on data available at the time of finalising this Review, euro area residential property prices rose in 2005, increasing by 7.6% (year on year) compared with 7.2% in 2004 (see Chart 2.15). This strong overall growth is
composed of diverse recent developments at the country level (see Table S4).
The latest figures for Greece and Ireland show accelerating house prices. However, there are tentative signs of house price moderation for several countries, such as Belgium, Spain, France and Italy. In Spain, house price inflation has continued to decelerate for the fifth consecutive quarter. While for 2005 as a whole, house prices in Germany declined (see
Table S4).
The growth of house prices is explained by strong housing demand, which is underpinned by favourable financing conditions. Supply has only sluggishly adjusted to increased demand, which has also contributed to price increases.
More recently, however, supply-side indicators such as building permits and residential investment have started to increase at a greater
pace (see Chart S51). In the past, decreases in housing investment as supply caught up with demand have led to substantial declines in the
vacancy rate, which could lead to more moderate house price increases in countries with a substantial private rental sector.
Valuation measures based on house price-torent ratios persistently point to some degree of overvaluation in a number of countries (see Chart S52). Looking ahead, it cannot be ruled out that Spain will witness further moderation in the future in view of the government’s planned policy initiatives aimed at containing house price increases.24 (24 The Land Act reform (Ley del Suelo) currently under discussion consists of three pillars: (i) increased construction of subsidised housing, (ii) more rapid approval of urban planning, and (iii) revision of land price policy.)
However, a correction in house prices could, depending on the underlying shock, have serious implications for the financial system through weaker economic activity, which would inhibit households debt-servicing ability and/or wealth effects.
