This paper examines the house price dynamics for thirteen European countries. A Markov-switching error correction model is estimated on house price returns at the country level, with deviations between house prices and fundamentals feeding into the short-run dynamics. The system is assumed to be in either a stable regime, in which deviations from the long-run equilibrium tend to vanish over time or in an unstable regime, in which no such correction takes place. The analysis yields three sets of results. First, house price returns in Europe are generally characterized by three (high, medium and low) phases; growth rates within regimes differ largely across countries. Second, for some European countries, the observed high growth phases are associated with a stable regime. Third, European housing markets have been more in sync with each other since 2000 following a growing trend in the time-span of 2002−2006and a dramatic downturn after the Lehman collapse in 2008 and during the debt crisis.  during the Euro area sovereign debt crisis.

Housing markets are historically prone to boom and bust episodes. A striking case in point is the Ireland and Spain housing market, where the current market downturn was preceded by a prolonged rise in house prices which began in the late 1990s. Some US State housing markets – including those in California and Florida – experienced a similar pattern. The role of house prices as a cause of the financial crisis of 2007−2009 has been a major topic of discussion among policymakers and academic researchers. Housing booms form gradually and may burst suddenly, producing detrimental effects on financial intermediaries, households, and indeed the economy as a whole. In this paper, we focus our attention on Europe which has experienced big swings inhouse prices in the last decades. This paper contains an econometric model designed to assess housing market cycles in Europe separating the high- and low-growth rates phases. The objective is to identify the different phases with the corresponding growth rates and to assess whether a high growth phase is associated with episodes in which house prices differ markedly from what would be implied by the underlying economic fundamentals. We intend to document both a wide variety of country-level experiences and situations in which housing markets exhibit similar behaviors.