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1. INTRODUCTION

Housing market developments in the years

preceding the financial crisis, and notably

the accompanying rise in household indebtedness in a number of Member

States, have contributed to the build-up of macroeconomic imbalances. Indeed, before

2008 house prices were characterised by a long and unprecedentedly strong expansion

in most Member States. This expansion was accompanied by large increases in

construction volume and in credit.

Since then, the correction experienced in

EU Member States has been very uneven. In some Member States, notably in Ireland

and Romania, real house prices decreased by more than 50% in the few years

following the crisis. In contrast, in

Belgium, Luxemburg and Sweden, prices have barely adjusted or have continued to

grow.

As the economic recovery is gaining ground, demand factors have picked up.

Accordingly, house prices have accelerated

in most Member States in 2016. This development calls for renewed attention to

the potentially destabilising role that large swings in housing markets can have and

to the potential accelerating role that the credit market can play.

The remainder of this factsheet reviews potential vulnerabilities in the housing

market and policy actions taken in the Member States to address them. It first

looks at developments in house prices and volumes to assess potential risks, notably

linked with credit. Social aspects are also reviewed. In the second section, policy

priorities are discussed, focusing notably

on macro-prudential policy, tax policy and on measures to tackle supply constraints.

Developments in the credit market are an important qualifier for the assessment of

vulnerabilities related to the housing market. This factsheet should therefore be

read in conjunction with the one on the banking sector. Tax policy can also have a

significant impact on housing developments and should be taken into account. Finally, as

housing policy has bearings on social

protection and cohesion, the factsheet on this topic should also be considered.

2. CHALLENGES

2.1. House price dynamics

A number of Member States are experiencing high or rising housing-

market-related vulnerabilities. In a context where interest rates have reach an

historical low and where growth is

strengthening in most Member States, demand pressures on housing markets are

building up. House price increases picked up in most Member States (Figure 1). In

Hungary and Sweden, the cumulative growth of house prices in 2015 and 2016

exceeded 20%. In Greece, Italy and Finland, real house prices continued to

record negative growth in 2016. For

Greece and Italy, this means the ninth consecutive year of house price

contraction. In order to assess the risks of housing price corrections, a number of

valuation techniques can be used to complement the analysis of financial and

housing indicators. These rely on the analysis of developments in the ratio

EUROPEAN SEMESTER THEMATIC FACTSHEET

HOUSING MARKET DEVELOPMENTS

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between house prices and rents (price-to-rent ratio) or households' gross disposable

income per capita (price-to-income ratio). Statistical analysis is also used to

disentangle the contributions of the various house price drivers.

As house price time-series are only available in index, the absolute values for the price-to-

rent and price-to-income ratio are not informative. In particular, they cannot be

compared across countries. As a consequence, the analysis focuses on the

deviation of the price-to-income and price-to-

rent ratios from their long-term average. This gap provides a useful benchmark to gauge

house price developments. The price-to-income ratio provides an indication of the

efforts required by the average household to purchase a house. A level which is far above

the long-term average signals that affordability has reduced. This can affect

demand and bring house prices back to a more affordable level. Similarly, in

equilibrium and for a given cost of capital,

agents should be indifferent to the choice between owning and renting a house. Rent

and house prices should therefore move together. The ratios' deviation from their

long-term value can be interpreted as deviation from the equilibrium on the

housing market. This would result in a change in the demand for rental and owner-

occupied apartments, bringing the price-to-

rent ratio back to its long-term level.

Figure 1 — House price growth

2016 2015 2014 2000-2008 2008-2016

BE 1.1 1.3 -1.3 5.1 0.6

BG 7.5 1.6 1.5 12.9 -5.6

CZ 6.6 3.9 1.8 6.6 -0.2

DK 4.1 6.3 3.0 5.3 -1.0

DE 5.3 4.1 2.2 -1.7 2.5

EE 3.8 7.0 13.1 n.a. -1.2

IE 5.5 8.5 15.5 5.9 -4.5

EL -2.0 -3.5 -5.0 5.1 -7.4

ES 4.7 3.7 0.1 8.1 -5.6

FR 1.0 -1.8 -1.7 7.5 -0.7

HR 2.2 -2.4 -1.1 4.6 -4.3

IT -0.7 -2.6 -4.6 3.6 -3.5

CY 1.4 0.2 -1.3 n.a. -4.0

LV 7.5 -2.7 4.2 12.9 -4.7

LT 4.4 4.6 6.3 12.0 -4.8

LU 5.8 5.9 3.9 7.5 3.6

HU 9.8 11.6 3.2 n.a. -1.9

MT 4.8 5.0 2.5 11.6 0.0

NL 4.4 3.3 0.0 2.4 -2.8

AT 7.2 3.5 1.4 -0.2 4.4

PL 2.4 2.7 1.1 n.a. -3.1

PT 6.0 2.3 3.9 -1.2 -0.9

RO 6.5 1.9 -3.3 n.a. -9.7

SI 3.6 1.4 -6.5 n.a. -4.1

SK 7.0 5.5 1.5 n.a. -2.4

FI -0.3 -0.3 -1.7 3.4 0.0

SE 7.5 12.1 8.2 6.5 5.8

UK 5.8 5.6 6.2 7.5 0.6

Source : Eurostat

% change in deflated House

Prices% CAGR

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Figure 2 — Price-to-disposable-income ratio, 2008-2016

Source: Eurostat, European Central Bank (ECB), Organisation for Economic Development (OECD), Bank of

International Settlements (BIS), European Commission calculations. Note: Gap compared to the long-term average over 1995-2016.

The price-to-income and price-to-rent ratios confirm that the adjustment in house prices

since 2008 has been very high in most Member States. In most of them, the current

level of these ratios is well below the 2008

level and also below the long-term average (Figure 2 and 3). This suggests that the

correction potential is limited for these countries and that further appreciation in real

house prices can be expected. Meanwhile, a

number of countries show ratios that are more than 10% above their long-term

average. These include Belgium, France,

Luxembourg, Austria, Sweden and the United Kingdom. For them, the countries that

experienced only a small adjustment in housing prices since the financial crisis, the

valuation ratios suggest that sizeable

adjustment can be expected in the future.

Figure 3 - Price-to-rent ratio, 2008-2015

Source: Eurostat, ECB, OECD, BIS, European Commission calculations.

Note: Gap compared to the long-term average over 1995-2016.

-40

-20

0

20

40

60

80

SE LU BE UK AT FR FI DK CY CZ IT NL DE EL EE ES SK SI IE HU PT MT

HR PL LT LV RO BG

2016 2008

-40

-20

0

20

40

60

80

SE LU BE UK AT FR FI DK CY CZ IT NL DE EL EE ES SK SI IE HU PT MT HR PL LT LV RO BG

2016 2008

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In order to complement the analysis through valuation ratios, statistical analysis can be

conducted to analyse if the developments in

real house prices are in line with what macroeconomic drivers would suggests1.

Indeed, in some cases, the strong growth in house prices may be linked to demographic

and supply factors, to a pick-up in income or to the particularly low interest rates. In other

cases, these usual fundamental drivers do not suffice to explain the rise in real house

prices. This suggests that house prices could be overvalued. Combining the information

from this fundamental analysis with the

analysis through ratios, a valuation gap is estimated. This makes it possible to map

countries based on the risk of correction in real housing prices and on the recent

developments (Figure 4). The mapping shows that in most Member

States, real house prices are within 10% of the level suggested by the various valuation

metrics. Looking to countries where prices

have increased fast recently, two groups can be delineated. In the first group,

including Luxembourg, Austria, Sweden and the United Kingdom, prices are increasing

at a fast pace although the valuation gaps are sizeable. These countries are thus those

where price dynamics need to be monitored

most closely as they cumulate risks of overvaluation and dynamic price

developments. In a second group, including notably Bulgaria, the Czech Republic,

Latvia, Hungary and Slovakia, house prices have picked up recently and are increasing

fast. Still, real house prices in these Member States remain below the peak

values recorded in 2008 and valuation metrics do not show significant over-

valuation. In these cases, the increase in

prices could give rise to speculative bubbles which may be difficult to deflate. Among

countries with large valuation gaps, Belgium and France stand out. In both countries, the

correction in prices and in valuation metrics following the 2008 crisis was relatively

limited. However, housing price developments since then have remained

muted. As a consequence, while risk have

not deflated significantly since the crisis, the sluggish growth in house prices, if sustained

through the economic recovery, could lead to a soft return towards fundamental values.

Figure 4 — Valuation gap and real growth in house prices, 2016

Source: European Commission, ECB, OECD, BIS, European Commission analysis.

Note: The valuation gap was calculated based on the price-to-rent ratio, the price-to-income ratio and a statistical model for fundamental drivers of house prices.

1 For details on the methodology, see Philiponnet N. and A. Turrini (2017), 'Assessing house price developments in the EU', Discussion paper, European Economy.

BE

DEIE

EL

ES

FR

IT

CY

LU

MT

NL

AT

PT

SI

SK

FI

BG

CZ

DKEE

LV

LT

HU

PL

RO

SE

UK

HR

-2

0

2

4

6

8

10

-30 -20 -10 0 10 20 30 40

Def

late

d H

P gr

owth

, 201

6 (%

)

Estimated valuation gap, 2016 (%)

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2.2. Volume developments

Volume indicators for housing markets are

useful for quantifying developments in construction activity, and should be seen as a

complement to house price developments. In particular, developments in the housing

market are affected by how the housing supply reacts to price and demand pressures.

Supply constraints, which induce a slow response of volumes to prices, can result in

longer episodes of booms and busts, with

higher price volatility. On the other hand, a more responsive housing supply means that

hikes in house prices translate into higher levels of construction activity. While rising

supply has a mitigating effect on price developments, it also means that the

macroeconomic impact of a correction in house prices accompanied by a drop in

volume will be much more severe.

Residential construction is a volume indicator that measures investment in residential

buildings in a given period. On average in the EU, dwelling investment represented 4.7% of

GDP in 20162, markedly below the 6.0% peak reached in 2007 but also below the pre-boom

levels. Investment in dwellings increased in 2016 across the Member States, with only a

few exceptions. This reflects the general

improvement in macroeconomic conditions and shows that, as a share of GDP, dwelling

investment remained close to its 2015 level.

In some Member States (e.g. Spain), the drop in housing investment reflects the

overinvestment of a few years ago; in others,

this is related to impaired credit supply and demand, and regulatory bottlenecks.

Germany, Austria, Sweden and the United Kingdom are the only Member States where

investment in dwellings as a share of GDP was higher in 2016 than before the crisis.

Beyond the actual investment, the number of building permits awarded within a year is an

early indicator of residential investment. This figure gives an indication of the number of

development projects under way. Building

permits have rebounded in 2016, with strong growth recorded in some countries, notably

those where the construction sector suffered most following the crisis (Figure 5). The

Netherlands and Romania are the only Member States in which issuance of new

building permits is still decreasing. At the other extreme, the number of building

permits is increasing fast in some Member

States, notably in Hungary and Malta. Despite the recent growth, construction activity in

2016 was generally well below its pre-crisis level. Germany, Lithuania, Poland, Slovakia,

and Sweden are notable exceptions. In these Member States, the number of building

permits issued is above the average recorded for the 2000-2007 period and continues to

increase at an annual rate of more than 10%.

Figure 5 — Number of building permits, in % change, 2016

Source: European Commission.

Note: Data for Luxembourg is not included.

2 Source: European Commission.

-100

-50

0

50

100

150

200

NL RO EL IT SI FI BG CZ UK DK EE AT ES PT IE CY LV HRHU FR BE MTDE SK PL LT SE

Contracting <10% growth p.a. >10% growth p.a.

Level relative to 2000-07 average Latest annual growth rate

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While building permits focus on new buildings, the number of residential

property transactions relates to both new

and existing buildings. As is the case for building permits, the number of overall

transactions has decreased dramatically

after the crisis and now appears to be picking up again. Still, this process

remains very slow and both the number

and the total values of transactions remain well below pre-crisis levels

(Figure 6).

Figure 6 — House transactions, 2007-2016

Source: ECB

Note: Data for the EU-28 where available. When information for a specific country is missing, values

are grossed up to the EU-28 average to avoid that the aggregate is impacted by country composition.

2.3. Impact of credit developments

Besides the potential valuation gap, the potential risks stemming from housing

price developments are notably linked to the level of banks' exposure to mortgages

and the indebtedness of households. Developments in the housing market can

significantly contribute to vulnerabilities in

the financial sector. This includes banks' growing reliance on mortgages,

persistently high leverage and weak lending standards (e.g. elevated loan-to-

value ratios, long loan amortisation maturities, low risk-weights on banks'

balance sheets for real estate exposure, etc.). In countries where household

indebtedness is high (e.g. Denmark, the

Netherlands and the United Kingdom), challenges linked to households' financing

capacity may also be a risk for banks3.

3 Source: European Commission.

While house prices and construction

appear to be picking up in most Member

States, developments in mortgages are more subdued. In a number of Member

States, households still face significant deleveraging needs. Notably, household

debt exceeds gross disposable income in almost half of Member States. The flow

of mortgages is still negative in Ireland, Spain, Portugal and the United Kingdom.

In some cases, notably in Hungary and

Croatia, the lingering vulnerabilities in the banking sector weigh on mortgages.

In contrast, some Member States are

experiencing very strong growth in mortgages, suggesting risks of a credit-

induced housing boom in some of them.

In 2016, annual mortgage growth exceeded 10% in Romania and Slovakia

and was above 5% in Belgium, the Czech

0

1000

2000

3000

4000

5000

6000

7000

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

2007 2008 2009 2010 2011 2012 2013 2014 2015

Value (EUR bn.) Number ('000)

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Republic, Estonia, Lithuania, Luxembourg and Malta4.

2.4. Social impact of housing developments

Developments in housing prices have a

deep impact on the affordability of

housing, with significant social consequences, in particular in growing

urban areas where demand outnumbers supply. This is demonstrated by high

levels of homelessness, housing cost overburden, long social housing waiting

lists, and difficult access for adults to enter the housing market. While the

crisis already had a negative impact on new constructions and welfare

provisions, the rise of poverty and

migration further stretched demand.

An affordable and good-quality home is crucial to a person's well-being and

social participation. Access to affordable housing is becoming increasingly

difficult in the EU. The crisis halted the

construction of new social housing in many Member States and even led

owners to sell existing stocks5. In many countries, there is an acute lack of

adequate and affordable social and private rental housing. Homeless

people's access to housing is limited as allocation mechanisms for social

housing rarely prioritise the homeless.

The rising house prices constitute an

increasing obstacle to housing access6. On average, roughly two in three (65%)

4 Source: European Central Bank. 5 http://www.housingeurope.eu/resource-

468/the-state-of-housing-in-the-eu-2015 Housing Europe is the European Federation of Public, Cooperative & Social Housing. It

exists since 1988 and is a network of 45 national and regional federations gathering

43.000 housing providers in 24 countries. Together they manage over 26 million homes, about 11 % of existing dwellings in

Europe. 6 http://ec.europa.eu/commfrontoffice /publicopinion/archives/ebs/ebs_355_en.pdf

Europeans consider that housing is too expensive. Less than a third (30%) of

the people surveyed said that it is easy

to find decent housing at a reasonable price in their area. overburden rate7

captures the running costs associated with the use of housing, and not only its

prices. It thus provides a more comprehensive assessment of housing

conditions and potential vulnerabilities related to impoverishment and housing

exclusion. In 2015, the housing cost overburden rate was highest in Greece,

at 40.9% of the population. This was

considerably higher than in any other Member State. Bulgaria, Denmark,

Germany and Romania had the next-highest ratios, all at around 15%. In

contrast, less than 5% of the population in Ireland (4.6%), Cyprus (3.9%), Malta

(1.1%) and Finland (4.9%) lived in a household facing housing cost

overburden. On average, 11.3% of the

EU population was overburdened by housing costs, but for those at risk of

poverty the figure was 39.3% and for the overall population it stood at 5.4%.

In most countries, the housing cost overburden was significantly higher for

tenants paying market rent (27% in the EU on average), than for owners with a

mortgage or loan (6.7% in the EU on

average).

7 The proportion of households for whom total housing costs represent more than 40 %

of disposable household income, net of housing allowances. Total housing costs consist of mortgage interest payments (for

owners) or rental payment (for tenants) as

well as other costs associated with the actual use of the accommodation, including the

costs of utilities (water, electricity, gas and heating), insurance, repair and maintenance, taxes, service and charges. Eurostat: EU-SILC (survey ilc_lvho07a).

Page 8 |

Figure 7 — Housing cost overburden rate by poverty status — 2015

Source: Eurostat

Households struggling with mortgage and

rent arrears, high utility bills and over-indebtedness and which are not receiving

any support may in the end face repossession and eviction. For the 2010-

2013 period, a sharp rise in evictions has

been registered in Bulgaria, Ireland, Spain, Cyprus, Latvia, Netherlands and the

United Kingdom8.

3. POLICY RESPONSES IN THE MEMBER STATES

Public policies can fuel or mitigate the build-up of vulnerabilities in the housing

sector. In a number of Member States, fiscal measures (e.g. deductibility of

mortgage interest payments) reduce the marginal cost of acquiring housing, which

- together with low interest rates and

expectations of future house price increases - can increase the potential for

speculative property investments by households and increases in household

leverage. Furthermore, supply-side measures (e.g. to boost the construction

of new properties amid high demand and rising property prices) can help improve

the responsiveness of the house supply to

potential price increases, limiting the risk of prices spiralling up. Given the strong

8 FEANTSA is the European Federation of National Organisations Working with the

Homeless http://www.feantsa.org/en/report/2017/03/21/the-second-overview-of-housing-exclusion-in-europe-2017.

link between housing and credit, macro-

prudential policies, which seek to ensure financial stability, can have a strong

impact on housing market developments.

3.1. Macro-prudential policies

Several Member States have actively

implemented macro-prudential measures to address vulnerabilities stemming from the

real estate sector. Their primary objective is

to dampen the inherent pro-cyclical dynamics between property lending and

housing prices but they also strengthen the resilience of the banking and household

sectors to financial shocks. Macro-prudential measures can take the form of bank-based

measures or borrower-based measures.

Measures targeting banks typically aim to

ensure appropriate capital requirements and impose a capital buffer to this end. Such

buffers can target economy-wide systemic risk but also be directly related to exposures

to real estate. Other macro-prudential measures may, for instance, aim to align

the risk-weights for specific items on banks'

balance sheets - such as mortgage loans - with risk profiles. Specific capital require-

ment add-ons for mortgage portfolios have been introduced in a number of Member

States (e.g. Belgium, Estonia, Austria, Slovakia and Sweden) with the aim of

increasing the banking sector's resilience amid heightened real-estate-related

vulnerabilities. Finland will introduce an

institution-specific risk-weight floor for mortgages on houses on its territory as of

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January 2018. In Denmark, in March 2017 the Systemic Risk Council recommended

that variable rate housing loans in the

Copenhagen and Aarhus regions be limited or have deferred amortisation if the

borrower's total debt exceeds 400 per cent of income before tax. The evidence to date

suggests that while bank-based measures have strengthened financial sector resilience

in a number of Member States, increased capital requirements have been insufficient

to stem soaring housing prices in some countries (e.g. Denmark, Luxembourg and

Sweden)9.

In addition to bank-based instruments,

national authorities have implemented national lending restrictions targeting

borrowers. Among these, the most frequently used are limits to loan-to-value,

loan-to-income or debt-to-income, and

debt-service-to-income10 ratios (Figure 7). Other instruments include loan maturity

restrictions and requirements for amortisation. Borrower-based instruments

directly target credit standards at their origin. Especially if implemented in a well-

designed package of mutually supporting actions, they have been empirically proven

to be effective in restricting risky lending

practices across a wide number of jurisdictions. Apart from reducing

households' vulnerability to property-price-related shocks, they can also increase bank

resilience. Their design is flexible and allows for parameters to be adjusted in order to

influence housing and credit market conditions. The complementarity of

borrower- and bank-based tools is

particularly pertinent during the upswing of credit cycles. In times of upswing, bank-

based tools could become less effective as capital ratios increase due to high bank

profitability and buoyant asset prices. In such circumstances, measures which

directly target lending standards at origin can reduce banks' incentives to engage in

riskier (high-loan-to-value/high loan-to-

income) lending.

9 European Systemic Risk Board (November 2016), Vulnerabilities in the EU residential real

estate sector. 10 Debt-service-to-income gauges the financial burden to households of paying the interest and principal on loans.

An in-depth comprehensive evaluation of the effectiveness of these measures across

the EU is challenging due to considerable

data gaps and also given the still fairly limited experience in applying macro-

prudential tools. Encouragingly, studies from some Member States which implemented

macro-prudential measures following the recent financial crisis tend to confirm their

effectiveness in mitigating real-estate-related financial stability risks11.

However, in a number of Member States with real estate risks, authorities have faced

difficulties in implementing macro-prudential instruments in a timely manner. This is due

either to constraints in their own national legal frameworks or to institutional and

governance arrangements for macro-prudential policy. For example, in November

2014 the Swedish supervision authority

(FSA) announced a draft regulation on amortisation for new loans. The

Administrative Court of Appeal in Jönköping issued an opinion that the FSA does not

have the legal base to impose compulsory amortisation. The legislative initiative was

then transferred to the government and had to pass through additional court reviews

before it was deemed constitutional, paving

the way for its implementation in the course of 2016. In Belgium, the National Bank of

Belgium (NBB) is the national competent and macro-prudential authority but only the

federal government can activate loan-to-value, loan-to-income and debt-service-to-

income limits. In the spring of 2017, the NBB proposed a buffer to cover risk-

weights for mortgage portfolios secured

against residential property to follow-up on an earlier similar measure which had

expired. However, so far the government has not taken up this proposal.

Risks related to the housing market are

followed up not only at national level, but

also at EU level given their potentially systemic nature. The European Systemic

Risk Board (ESRB) is the EU body in

11 See Commission Staff Working Document SWD (2016) 377 on the impact of capital and

liquidity requirements; https://ec.europa.eu/transparency/regdoc/rep/10102/2016/EN/SWD-2016-377-F1-EN-MAIN-PART-1.PDF.

Page 10 |

charge of monitoring macro-financial risks. It has a mandate to issue warnings

when significant systemic risks are

identified and when it is necessary to flag them. The ESRB has undertaken

systematic work on analysing vulnerabilities in the EU residential real

estate sector. In November 2016, this culminated in the ESRB issuing warnings

for eight EU Member States: Belgium, Denmark, Luxembourg, the Netherlands,

Austria, Finland, Sweden, and the United Kingdom12. The key vulnerabilities

highlighted by the ESRB assessment are

of a medium-term nature. They relate in particular to: high or rising household

indebtedness, notably in Belgium, Denmark, the Netherlands, Finland,

Sweden and the United Kingdom; overvaluation or strong price dynamics of

residential real estate, e.g. in Belgium, Denmark, Luxemburg, Austria, Sweden

and the United Kingdom; loosening

lending conditions or the pace of bank lending, e.g. in Austria, Belgium and

Luxemburg; and/or potential spill-over effects for other countries especially in

the Nordic-Baltic region if risks were to

materialise e.g. in Denmark, Finland and Sweden. As regards the remaining

Member States, the ESRB either did not identify a build-up of material

vulnerabilities relating to the residential real estate sector, or identified such

vulnerabilities but considered that the policy stance was sufficient to address

them. This was the case for Estonia and Slovakia.

Since the ESRB warnings were issued,

country-specific monitoring under the European Semester will follow real estate

developments in the countries for which real-estate-related stability risks are a

concern. The analysis of real estate markets in the EU is hampered by

sizeable data gaps, however. Against this background, the ESRB has issued a

specific recommendation on closing real

estate data gaps13.

Figure 7 — Macro-prudential measures targeting real estate risks on bank balance sheets

Source: ESR

Note: LTI – Loan-to-value; LTI – Loan-to-income; DTI – Debt-to-income; DSTI – Debt service-to-

income; PTI – Price-to-income.

12 ESRB press release of 28 November 2016: http://www.esrb.europa.eu/news/pr/date/2016/

html/pr161128.en.html. 13 See: http://www.esrb.europa.eu/pub/pdf/recommendations/2016/ESRB_2016_14.en.pdf.

Measure EU Member State(s) using the measure

Adjusted risk-weights BE, HR, IE, LU, MT, RO, SI, FI, SE, UK

LTV limits CZ, DK, EE, IE, CY, LV, LT, LU, HU, MT, NL,

PL, RO, SK, FI, SE

LTI/DTI limits IE, PL, UK

DSTI/PTI limits EE, CY, LT, HU, PL, RO, SK

Stress test/sensitivity test/other

prudent lending standards requirements

BE, CZ, DK, IE, CY, LU, RO, SK, UK

Loan maturity EE, LT, NL, PL, RO, SK

Loan amortisation requirements DK, NL, SK, SE

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3.2. Tax policy

Housing-related tax policy can shape

incentives on the housing market. Tax

measures can notably weigh on the preference between renting and buying.

Two specific types of measure are important in this respect. First, the tax system may

induce a debt-bias, thus favouring home ownership. Indeed, more than one-third of

Member States have a tax system that subsidises mortgage debt financing, notably

through mortgage interest deductibility. Steps to reduce such measures have been

taken in recent years, as they often

encourage house price hikes and favour high-income households. In particular, the

countries where mortgage interest deductibility remains important, i.e.

Belgium, Denmark, the Netherlands, and Sweden, are all characterised by high

household indebtedness and have seen a significant increase in housing prices. In

2017, the Council addressed country-

specific recommendations to the Netherlands and Sweden to reduce

mortgage tax deductibility so as to reduce distortions on the housing market.

Low property tax is also an implicit subsidy on home ownership which may result in

sub-optimal resource allocation. The implicit

rent that homeowners get from their investment is generally not taxed, except in

a few Member States (notably the Netherlands, Luxembourg and Slovenia).

This gives housing investment comparatively favourable tax treatment.

Recurrent property tax on housing is somehow akin to a tax on implicit rent.

However, the amounts collected are generally small (Figure 8), on average representing less than 1% of GDP and

contributing at most 8% of total government

revenue in the United Kingdom. In addition, the property value identified for tax

purposes is often only loosely connected to market value, which creates distortions.

Taxes on transactions are more closely

related to a property's market value. Such taxes favour long-term ownership of

dwellings, thus contributing to the reduction of speculative bubbles. However, they may

also discourage potential buyers and sellers and thus reduce mobility.

Figure 8 — Recurrent taxes on immovable properties, in % of GDP, 2015

Source: European Commission

0

0.5

1

1.5

2

2.5

3

3.5

FR

UK

EL

DK IT BE

ES

PL

CY

NL

PT

LV

SE FI

IE

RO

HU SI

DE

SK LT

BG

EE

CZ

AT

LU

HR

MT

Recurrent taxes on immovable properties

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3.3. Addressing supply constraints

3.3.1. Zoning restrictions

Restrictions on the supply of housing, such

as zoning or construction regulations, result in higher elasticity of prices to

housing demand. In countries with

significant demographic pressure, this contributed to an increase in prices, with

differentiated impact on the various regions. Relaxing zoning regulations in a

context of accelerating housing prices can lead to resources being diverted towards

the construction sector. In 2017, the Council addressed country-specific

recommendations to Sweden and the United Kingdom recommending that they

support investment and construction,

notably by revising planning rules.

3.3.2. Rental market regulations

The way the rental market operates can

have deep implications for housing market dynamics. Because they are an essential

source of affordable housing, rental markets are usually subject to strong

public intervention with, on average, one

third of tenants in the EU paying a reduced or no rent. Beyond such social

measures, market rents themselves can be controlled, notably through caps on

annual rent increases. The degree of rent control is particularly strong in Denmark,

Austria, Sweden and Germany14. On the one hand, a higher degree of rent control

protects tenants from booms and busts in the housing market. On the other hand, it

may result in rents being disconnected

from house prices, thus depressing rental yields when house prices increase and

discouraging the supply of rental housing, which contributes to a home ownership

bias.

Date: 22.11.2017

14 Bricongne J.-C. and A. Mordonu (forthcoming), 'Rental Market in a macroeconomic context',

European Economy based on a methodology described in Cuerpo C., P. Pontuch and S. Kalantaryan (2014), 'Rental market regulation in the European Union', European Economy.