Effect of House Prices on Economic Growth

The differences in growth rates of EU countries in the 1995-2003 period can be attributed largely to the development of house prices and their effect on residential construction and private consumption. Rising real estate prices in the Anglo-Saxon and Northern European countries accelerated residential construction activities and also had a stimulating effect on private consumption through wealth effects. In market-based financial systems such as in Great Britain or Northern Europe, reactions are clearly stronger than in bank-based systems such as in continental Europe. Despite the success achieved on a medium-term basis by many countries with flexible real-estate markets and market-based financial systems, a long-term growth strategy should not be based on these instruments, for soaring property prices tend to be followed by a downturn affecting the economy as a whole.