House prices in Europe have shown diverging trends, and this paper seeks to explain these differences by analyzing three groups of countries: the “fast lane”, the average performers, and the slow movers. Price movements in the first two groups are found to be driven mostly by income and trends in user costs, and housing markets in these countries seem relatively more susceptible to adverse developments in fundamentals. Real house price declines among the slow movers are harder to explain, although ample supply, low home ownership, and less complete mortgage markets are likely factors. The impact of macroeconomic, prudential and structural policies on housing markets can be large and should be a factor in policy decisions.

House prices in Europe have shown significantly different trends. Whereas there have been sharp increases in, for example, Spain, Belgium, Ireland, the United Kingdom and the Netherlands, there has been far less movement in countries such as Austria, Germany and Switzerland. This divided picture contrasts with the increase of house prices and is somewhat surprising in light of the European convergence process.2 In particular, although eurozone countries now have similar nominal interest rates, house price patterns diverge.3 These different trends cannot simply be explained by economic catch-up, since some of the highest rates of increase in house prices have manifested themselves in highly developed countries.