Bubbles in real estate? A Longer-Term Comparative Analysis of Housing

The downturn in the US housing market has attracted a lot of attention as it has sparked a global financial crisis. It is generally assumed that the eurozone does not face a similar problem. This paper shows that this assumption is wrong. 1) The euro area average index of real housing prices has risen almost as much as that of the US and is now (as that of the US) about 40 % above its 30-year average. This is similar to the overvaluation of Japanese real estate at the height of the Japanese bubble, which was then followed by over a decade of continuous decline. 2) Over the last 30 years, the euro area index for real housing prices has tended to follow that of the US quite closely. The lag is now much shorter than in the 1970s or 1980s. The euro area market is thus likely to turn soon as well. One feature of housing price cycles that tends to be forgotten is their extraordinary length: many last for more than ten years. This persistence means that the downswing, which now seems to have started, is likely to last at least until the next decade. Within the euro area, there are large divergences: cases of ‘froth ’ (Spain, for example