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After sharp recent price rises in France, Spain and Italy, the European Central Bank (ECB) has reported that the euro zone housing market is becoming overvalued.
In its recent monthly bulletin, the ECB stated 'Euro area house price valuation measures continue to be above their historical averages.' It then went on to predict that recent house price rises in some euro zone regions may be unsustainable as house price inflation outpaces income growth. Euro zone house price inflation was up on previous years at 7.7% in the first half of 2005 (following rises of 7% in 2004 and 7.1% in 2003).
As Overseas Property Professional magazine points out, demand for property around Europe has been driven by falling interest rates and increasing affordability at a time when banks have also been relaxing their mortgage lending criteria. The result has been a dramatic rise in mortgage borrowing which was around 35% of GDP at the middle of last year compared to 25% in 1999.
The ECB said: "Residential property prices are currently 15 to 25% above their historical average; by comparison with the last episode of strong residential price increases in the early 1990s, the positive valuation gap is today significantly larger."
However, the Bank also claimed that these rises were not excessive in comparison with previous housing booms.
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