Bubbles in real estate? a longer-term comparative analysis of housing prices in Europe and the US

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This paper presents a composite indicator for euro area housing prices and compares its evolution over the long run with that of the US. The main findings are two-fold:
1. The euro area average index of real housing prices has risen almost as much as that of the US and is now (as is also the case with that of the US) about 40% above its 30-year average. This is similar to the overvaluation of Japanese real estate at the height of the Japanese bubble, which was then followed by over a decade of decline.
2. Over the last 30 years, the euro area index for real housing prices has tended to follow that of the US quite closely, but with a lag of around 18 months. Given that the US market turned in mid-2006, one could thus expect that the euro area market is likely to do the same as 2007 turns into 2008.