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After the abrupt housing price rises of recent years, the residential market in the euro zone was cooling off and would gradually return to normal, according to the monthly bulletin of the European Central Bank.
The annual growth rate of residential property prices in the euro zone as a whole was five per cent in the first half of 2007, down from 6.1 per cent in the second half of 2006. In general, available estimates suggest that house prices continue to be on a gradual path towards normalisation following the acceleration observed between the mid-1990s and 2005.
Country data suggests that the moderation in euro zone house price inflation was particularly pronounced in those countries that recorded relatively high residential property price rises in recent years, such as Belgium, Ireland, Spain, France and Malta. By contrast, in the cases of the Netherlands and Austria, available data suggests that house price increases in 2007 were roughly unchanged compared with those recorded in 2006.
In general, recent developments in the euro zone's residential property prices primarily reflect a slowdown in the demand for housing. Although household income showed sustained growth, a “crude” index of housing affordability, that is the ratio of households’ nominal disposable income to the residential property price index, remained relatively low, stabilising in the first half of 2007 after declining continuously since 2002.
This decline reflects the strong rise in house prices witnessed over the past few years and the increase in bank lending rates for house purchases observed during 2007. A moderation in housing demand can also be seen in the development of mortgage loans, the annual growth rates of which started to decline in early 2006. These indications of a softening in the demand for housing coincided with a fall in the growth of building permits granted over the same period.
Available demand and supply indicators suggest that a further moderation in residential investment growth can be expected in 2008.