Drivers of European housing prices in the new millennium: demand, financial, and supply determinants

Abstract

Many countries in Europe have experienced a steady increase in housing prices over the past decade, which continued even during the recent crisis. We analyze a panel of 15 European countries over the period 2000-2020. We find that demand-side determinants, such as GDP, unemployment, wage and population, strongly influence housing prices. Nevertheless, we suggest that construction costs, access to finance (credit to GDP), and financing costs (long-term interest rate) should be included to avoid biased results. We find that financial development can significantly affect housing prices in the long run. We confirm the robustness of our results by conducting a lag sensitivity analysis of selected determinants. In addition, we find a negative effect of the GFC and a positive effect of the Covid crisis on housing prices. Furthermore, we find that countries with a mild reaction to or a quick recovery from the GFC experienced significantly higher housing price growth.