Trends on Europe’s property market
The article covers property market trends in selected European countries from the start of the new millennium. We look at the property market from the perspective of property prices in both nominal and real terms. We supplement this view by analysing property price ratios relative to trends in rents and income. Overall, these enable us to make a deeper comparison and assessment of property market trends across time and countries. The article also compares the shares of owner-occupied and rental housing in European countries, which vary significantly depending on historical, economic and cultural factors.
Property prices and crises
Europe experienced several crises in the 21st century and trends in property prices varied during them. After the collapse of Lehman Brothers in September 2008, house prices experienced a marked correction worldwide, but there were large differences across countries. Significant corrections occurred mainly in Ireland and Spain, whereas the decline in Germany, for example, was not as pronounced (see Chart 1). However, many countries then saw a decade during which property prices rose steadily.
Chart 1 – Nominal property price growth in selected European countries
(index 100 = 2008)
Source: OECD
The Covid crisis had no tangible effect on property price growth in most countries. From the perspective of the data, 2019 and 2020 were just years when property prices rose gradually. At the same time, however, central banks eased monetary policy, further supporting property price growth via more available financing. Property prices thus surged, especially in the Czech Republic. 2022 was the year of Russia’s attack on Ukraine and the start of the energy and security crisis in Europe. At the same time, high inflation tightened monetary policy, reduced available financing, caused falling demand and thus falling property prices in several countries.
Looking at real estate prices from the perspective of real prices, i.e. prices adjusted for inflation, we can then see that in Italy, for example, property prices have been falling steadily since the financial crisis. On the other hand, in Poland, where property prices have been rising steadily in nominal terms since 2013, they declined in real terms due to high inflation, the same as in other countries (see Chart 2). Real property prices peaked in most countries at the end of 2021, as real property prices declined in 2022 – mainly on account of high inflation. Growth started to recover again last year.
Chart 2 – Real trends in property prices in selected European countries
(index 100 = 2008)
Source: OECD
Main property market factors and indicators
Property prices are affected by a wide range of general economic and non-economic factors, as well as events such as the COVID-19 epidemic, which temporarily increased demand for recreational property and conversely reduced demand for short-term rental investment apartments due to travel restrictions. The main demand factors explaining property price trends include wage growth or more precisely disposable income, growth in loans related to housing financing (in particular mortgages), higher job offerings respectively lower unemployment, growth of construction, interest rate trends (a decline in interest rates leads to a rise in property prices), demographic factors (population growth, higher marriage rate and divorce rate lead to property price growth), the size of the property market (higher supply reduces property prices) and level of rents (higher rents cause growth of real estate prices). On the supply side factors explaining property price trends include limited property supply in a specific location, prices of construction materials and volume of construction itself. Supply in the property market is driven also by the profitability of construction and regulatory and administrative factors (length of the process and other requirements) and is regarded as sticky in the short run.
To make the property market easier to understand and to compare trends in property markets, ratios for individual countries, regions and cities are constructed. They include the price-to-income (P/I) and price-to-rent (P/R) ratios.
The P/I ratio provides basic information about the affordability of property in relation to income (Charts 3a and 3b). A high P/I ratio indicates that property purchasing costs are high relative to the ability to finance them from income, while at the same time the interest rate and loan-to-value (LTV) ratio[1] make it more difficult to repay any debt financing for real estate purchases. For the trends in the indicators, we divided the countries under review into two groups, large advanced economies and eastern European countries. The affordability of property increased in all the compared countries in 2023, thanks mainly to subdued property price growth and rapid overall wage growth. The situation in Germany, where housing affordability was constantly declining, deviated significantly, but in recent years the price-to-income ratio has returned to the level it was at around ten years ago. Of the V4 countries, housing affordability increased most of all in Poland after the financial crisis, despite continued growth in property prices. Income growth is therefore keeping pace with properties. By contrast, the situation in the Czech Republic, where housing unaffordability relative to income peaked in 2022, is the worst and is getting even worse.
Chart 3a – Price-to-income ratio (P/I): countries in the euro area and the global economy
(index 100 = 2008)
Source: OECD
Chart 3b – Price-to-income ratio (P/I): V4 countries
(index 100 = 2008)
Source: OECD
The P/R ratio provides basic information about trends in the property prices relative to rental prices (see Charts 4a and 4b). An increase in the ratio may indicate an overvaluation of property prices driven by expectations about future property-related profits, but may likewise indicate that owner-occupied housing is less advantageous than rental housing. If there is optimisation (arbitrage) going on, interest in owner-occupied housing should decline as the ratio rises. The P/R ratio does not seem entirely suitable for the exact determination of property price misalignment, as it takes into account neither opportunity costs (property investment income cannot be compared, for example, with government bond yields) nor the interest rate, which is related to the affordability of loan financing. The inverse of the P/R ratio, i.e. the rent return, is of some help, as it can be directly compared with the long-term interest rate, enabling the opportunity costs to be approximated. A high rent return (i.e. a low P/R ratio) relative to home loan rates can open up space for potentially risky speculative property purchases. At first glance, trends in the ratio in our sample of countries are similar to those in the case of relations to income. In the large advanced economies, the return on rents in Germany decreased the most, i.e. rents are not growing that fast there. Poland is the most interesting of the V4 countries for investors.
Chart 4a – Price-to-rent ratio (P/R): large global economies
(index 100 = 2008)
Source: OECD
Chart 4b – Price-to-rent ratio (P/R): V4 countries
(index 100 = 2008)
Source: OECD
Assessment of property price misalignment
Development of real estate prices and basic ration indicators already provide general information about the mismatch of real estate prices. As shown, the property market experienced a visible correction after 2008. Like trend curves and statistical filters, the P/I and P/R ratios are used to get a quick idea about a particular property market and are especially popular with financial market practitioners. The unanswered question is whether the indicators presented are move in the same way and what conclusion about the property prices misalignment can we make using the knowledge of long-term trends. If price development is well above the long-term average, the P/I and P/R ratios would also likely be higher, as both are directly proportional to property prices.
Further information on the mismatch in real estate prices can be obtained by looking at statistical filters for trends. These are among the simplest approaches, however, these results may not necessarily be less successful ex ante than those obtained based on much more sophisticated methods, which, however, usually also provide an answer about what factors most strongly affect property prices. The Hodrick-Prescott filter (HP filter) with a recommended smoothing coefficient for the given time series periodicity, the Band-Pass filter (BP filter) and other univariate filters can be used to calculate trends.
Chart 5 summarises the current P/I and P/R ratios together with the misalignment results obtained using the Hodrick-Prescott filter. The disadvantage of the static HP filter is the well-known problem of endpoint bias, which is more pronounced at times of rapid property price changes. Chart 5 shows that in general property prices oscilate around the long-term average relative to household income in the selected sample. The exception is the Czech Republic, where property prices relative to income are well above the average, while at the opposite end it is Italy, where prices are below the long-term average relative to income. All the countries except Italy are below the long-term average of rental yields, as the price-to-rent ratio is well above the long-term average. From the perspective of the statistical filter, the price of property in Poland is around 9% above the long-term average, while at the opposite end lies Germany, where prices fell sharply and reached values under the long-term trend. More complex structural models would have to be used to obtain a more robust idea of the degree of property price misalignment with fundamentals.
Chart 5 – Property price misalignment in selected countries
(%)
Source: authors’ calculation based on OECD data
Note: HP filter for mid-2024, P/I and P/R indicators expressed in mid-2024 compared to their long-term average in the relevant country. Countries ranked according to the HP filter
Would Europeans rather be in their own home or rental accommodation?
Property prices and indicators relative to income and rents affect households’ preferences as to whether to buy or rent the place where they live. The share of owner-occupied and rental housing varies significantly across European countries, depending on historical, economic and cultural factors. On average, around 70% of the European Union’s population owns a property. In Eastern European countries, the share of owner-occupied housing is generally higher, while rental housing is more common in Western European countries. Romania has the highest share of owner-occupied housing (over 96%) and Switzerland the lowest (Chart 6).
Chart 6 – Share of owner-occupied housing in Europe
(%)
Source: Eurostat
Note: Data for 2023
The economic factors supporting the preference for owner-occupied housing include mainly the availability of financing (low interest rates and the maturity of the mortgage market support owner-occupied housing), (property prices (the lower property prices, the more households can get a mortgage in an average amount to finance an average size of property), and the stability of household income (the lower the unemployment rate, the more stable household income is, which supports financial confidence for taking on a mortgage liability).
Purchasing your own home is often not a result of a purely economic perspective, but cultural and social factors are also an important factor in the purchase. These include e.g. long-term traditions, mentality and historical trends reflecting, for example, the privatisation of the housing stock after the fall of Communism in Eastern Europe, the traditional propensity to inherit property in southern and eastern EU countries, and also the traditional preference for rental housing in Western Europe (a standard and long-term stable alternative to owner-occupied housing) and family backgrounds and links (people planning a family or living in an intergenerational property usually prefer owner-occupied housing).
Demographic factors also influence housing demand, which mainly include age (younger people mostly prefer rental housing, older people owner-occupied housing, which reflects their view of property as an investment or a way they can provide for themselves in old age. This is undoubtedly related to the expected size of income in old age; if it is lower, then owner-occupied housing is preferred). Next factor is the degree of urbanisation (in cities there is a higher propensity to rent housing, as its supply is also higher; in villages owner-occupied housing is clearly ahead as these mainly include family houses). At the same time, given the high owner-occupier share, the supply of rental properties may not be sufficient, which may further limit the development of some localities.
The fourth group of factors can be placed under the legal and institutional area, and includes the degree of regulation of the rental market (in countries with strict protection of tenants' rights, such as Germany, rental housing is more attractive), as well as the field of taxes and subsidies (tax breaks on mortgages or direct subsidies for property purchases motivate ownership of housing; in some countries rental housing may be favoured by lower taxation of rental income).
The last group consists of psychological motives associated with property holdings. This concerns feelings of certainty and social prestige. Both these factors argue in favour of owner-occupied housing. If people buy property for long-term use, a high degree of owner-occupied housing will be associated with stable property prices amid the sufficient construction of new property in popular locations. A high degree of owner-occupied housing has a negative effect on population mobility and hence on labour market flexibility. Ownership of real estate entails higher transaction costs, which it is advantageous to pay only in the event of longer use.
Conclusion
The European property market has undergone major changes over the last quarter of centrury, reflecting the impact of economic crises, demographic trends and monetary policy. The 2008 crisis brought a sharp correction to house prices in some countries, such as Ireland and Spain, while countries such as Germany exhibited more stable trends before as well as after this event. Recent years have shown the growing impact of inflation, which has led to a fall in real property prices, although nominal property prices have often increased further.
Ratios such as price-to-income (P/I) and price-to-rent (P/R) provide valuable insights into the current situation and long-term sustainability of the market. Although most European countries report values close to their long-term averages, the Czech Republic and Poland remain extremes – the first with significant housing unavailability and the second as an attractive location for investors due to the relatively low prices in relation to rents. Future market trends are likely to be determined by a combination of macroeconomic factors, central bank policies, and property supply and demand dynamics.
The availability of owner-occupied and rental housing varies across Europe. The reasons could be found among economic, historical and cultural factors. In Eastern Europe, owner-occupied housing, often associated with the post-communist privatisation of the housing stock, is dominant, while in Western Europe rental housing is more common thanks to better regulation of the rental market. Factors such as the availability of financing, degree of urbanisation and tax policy significantly influence households’ decisions on buying or renting. Although a high share of owner-occupied housing increases market stability, it may also reduce labour mobility and labour market flexibility. However, housing unaffordability in relation to household income remains high, especially in countries such as the Czech Republic.
Authors: Luboš Komárek and Petr Polák. The views expressed in this article are those of the authors and do not necessarily reflect the official position of the Czech National Bank.
Keywords
Property prices, financial crisis, COVID-19
JEL classification
E32, R31, R33
[1] This is discussed in more detail in the Financial Stability Report, for example