Ranking European Union countries on their long-term prospects for housing price growth: a composite index

Abstract

A conceptual model – in the form of composite index – is put forward to highlight the comparative inflation potential of national, residential real estate markets of the European Union.

The composite index is formed from a suite of economic, demographic, sociological, and environmental variables. They are drawn from the literature as the best indicators of long-term, aggregate housing price growth for the given context.

The variables proposed are: future economic growth; future population growth; future population youthfulness; super-normal infrastructure investment; future mortgage growth; latent demand; future climate; supply inelasticity; and cyclical undervaluation.

These variables are represented in the composite index by datasets from, respectively: The Atlas of Economic Complexity; United Nations World Population Prospects; Eurostat Europop; European Commission Structural Investment Funding allocation; European Mortgage Federation Hypostat (outstanding loans to disposable income); Eurostat SILC (adults living with parents), and World Bank annual remittance data; Meldelsohn et al. (2000); Nordregio Mountain Areas in Europe, and Eurostat Land Cover (water and wetlands); and the OECD Analytical House Price Database (index price to income ratio).

The results indicate differences between countries in their profile for prospective long-term price growth. “Emerging” and “peripheral” countries dominate the high rankings. When compared against countries’ current average dwelling price, the results imply long term price convergence.