Assessing house price developments in the EU

Booms and busts in house prices may have major macro-financial implications. Accordingly, monitoring developments in house prices plays an important role in the assessment of macroeconomic risks. This paper provides a methodology to estimate benchmarks for the assessment of developments in house prices in the EU context. A number of approaches are developed, based on (i) long-term averages for price-to-income ratios, (ii) long-term averages for price-to-rent ratios (iii) predictions from cointegration relationships between real house prices and their demand and supply determinants. With the latter approach, cointegration analysis is carried out both on individual countries' time series and on a panel of EU countries. The paper makes alternative proposals for computing long-term averages for price-to-income and price-to-rent ratios with a view to combining cross-country comparability with representativeness. The various benchmarks are combined to define a single synthetic benchmark based on model averaging techniques.